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Issue: 38 - Feb 15, 2012
Using Key Performance Indicators to Better Manage Your Practice
By: Jared M. Pelcic
Marsha L. Heinke, CPA, Inc
In today’s veterinary practice, financial data availability is simply overwhelming. A doctor or practice manager can blow through a massive number of hours poring over modern practice management software that provides virtually endless data.  Accounting software can do the same. 
 
The danger of being overwhelmed is that nothing happens at all.  Let’s get back to the basics and systems that help efficiently completing analysis so you can take action
 
Garbage in, garbage out. Data is only useful if it is accurate.  When practices rely on improperly-trained, albeit well-meaning bookkeepers, expenses can be miscoded or lumped into a miscellaneous category, and revenue can be recorded to the wrong revenue accounts.  Inaccurate financial data can be just as bad as no data; in the end, it really tells you nothing. 
 
Data can also lack detail, or contain too much detail.  At some point, your practice must weigh the labor costs and management benefits of providing detail in recording transactions, both in practice management software and accounting software.  It is good to take the time to provide high levels of detail, but segregating revenue, for example, to dozens of revenue accounts in the financial software is very time consuming and may provide very little benefit. 
 
Voluminous data can be confusing since you may lose focus of what to evaluate. You don’t want data that is so granular you can’t see the important indicators, yet you would like to access detail when you need to take a closer look. Detail may also support the practice’s very important internal control systems.
 
Trending analysis. Ultimately, your goal is to have data points that measure results, establish trends, give real-time feedback to the hospital team, and allow you to make decisions and direct activities for overall operational improvement.
 
This is where key performance indicators (KPIs) come in handy.  Once you have established accuracy and a balanced level of detail in your data, your practice can determine which KPIs to track and when. Some KPI’s can be traded in and out, depending current practice initiatives and strength and weakness analysis.
 
Key performance indicators help bring into focus the big picture of what is happening at your practice.  For each KPI, the trend gives “at-a-glance” assessment of practice financial and transactional health, supporting faster, more informed decisions on everything from marketing to hiring to new equipment purchases. 
 
When trending KPIs, consider using a twelve month roll, in which the total of the most recent twelve months of activity is traced month over month. This eliminates seasonality influences that might confuse interpretation.
 
Here are a few valuable KPIs for you to consider:
 
Number of new clients.  Tracking the number of new clients realized per month is a strong indicator of business growth.  New clients per full-time equivalency (FTE) veterinarian should be tracked monthly over time. Practice location, demographics and maturity will drive different numbers, so you need to know your own. As a benchmark, consider that the 6th edition of AAHA Pulsepoints says 2009 average clients per FTE is 1,070 and that client turnover is roughly 25% per year, indicating that just to maintain client base, 257 new clients per year (21.4 clients per month) would be required.
 
If your practice KPI shows a declining number of new clients per month, it is time to evaluate reminder systems and client service, in addition to marketing strategies towards existing clients. Since existing clients continue to be a significant source of new clients, evaluate referral sources and overall client satisfaction.
 
If you had a strong number of new clients per month  in 2010, but a lot less in 2011,  look back at 2010 to see what was done differently that may have contributed to a larger number of new clients. Did a system failure result in the decline? Until proven otherwise, internal factors are assumed to cause decline, not outside forces like the economy. 
 
Percentage of new clients returning for a second visit.  Gaining new clients is critical, but is nearly irrelevant if they do not return.  Tracking the percentage of first-time clients that return for a second visit within a twelve month period of time will indicate if the entire team is providing excellent client service and driving compliance.  If the percentage is not approximately 70%, there is a problem that requires immediate investigation.  Start with client surveys for clues as to what should improve.
 
Rolling 12 month sales.  Tracking the rolling 12 month sales provides a wide-angle view of practice’s activity. This rolling average is a basic indicator of internal financial health that, in conjunction with other KPIs, paints a picture of your practice’s financial trends. 
 
Average Transaction Charge (ATC).  The practice ATC is calculated by dividing total revenue generated by the total number of transactions for the same time period.  Monitoring fluctuations in the practice’s ATC will highlight the months or quarters in which practice efforts should be replicated or avoided.  Perhaps the average transaction charge has been falling due to decreased diagnostics performed.  Monitoring your practice’s ATC will help you to focus on driving increased compliance on important revenue-generating items. 
 
Rolling 12 month operating profit.  Operating profit is just that—the profit remaining after taking normal operating revenue and subtracting normal operating expenses.  Following both long-term trends and short-term cycles is revealing. Fluctuations in operating profit can be triggered by major purchases or fraud.  An increase can reveal what’s working in your practice that will lead to long-term strong growth.  If the practice is growing but not hiring staff, operating profit will likely increase at a high rate in the short-term, but there may be long-term negative consequence resulting from staff being spread too thin. 
 
Rolling 12 month support staff payroll.  Tracking support staff payroll as both a dollar amount and a percentage of gross revenue is important.  Failing to adequately staff a practice can negatively impact future profitability.  Client service, reminders and clinic programs may suffer, ultimately restraining or reversing growth.  Monitoring support staff payroll might also reveal that support staff pay has remained flat while service has been exemplary, leading the need for employee raises to keep your high-performing team together. 
 
Days in accounts receivable.  If the practice maintains an accounts receivable balance, track the average amount of time that it takes for clients to pay their balance. Divide annual credit sales by the average total accounts receivable, then divide by 365 days.  The longer this time frame is, the longer it is taking to collect payment on services that have already been rendered.  If you have noticed that your days in account receivable in increasing, it is time to tighten your credit and collection policies and procedures. 
 
Rolling 12 month average of COPS Expense.  Tracking the rolling 12 month average of your costs of professional services (COPS) as a percent of sales in excellent indicator of how well inventory and other service-related costs (such as outside lab expense) are converted into sales.  If this average is decreasing, inventory handling is improving and costs are being minimized while growing sales.  An increasing average may point to a need to raise fees, especially if they have not been raised recently or consistently. It might also point to drifts from procedure, inefficient inventory handling, internal control issues, or other operational issues. As with any KPI, a change in trend is what should prompt you to investigate further.
 
These are a sample of some common and helpful KPIs.  You may choose other key performance indicators.  Talk with your CPA about performance goals and the kind of data you are able to generate.  Over time your practice’s key performance indicators will enable faster decisions that more consistently fit the strategic vision of your practice.