Managing a veterinary clinic: profitability and liquidity

Monitoring profitability and liquidity is fundamental to managing a business: any shifts in the data indicating that the veterinary centre has become economically unsustainable must be detected as soon as possible.

Clinic profitability ratios

You can use the DuPont formula to determine how to manage a veterinary clinic while maintaining an appropriate level of profitability:

ROE (24) = (Net Profit / Income) [1] x (Income / Assets) [2] x (Assets / Own Equity) [3]

The DuPont formula provides an indication of the clinic’s cost–effectiveness (measured by return on equity [ROE], which is equivalent to the profit shared between the company’s investors), as a function of three factors:

• Profit margin. As long as the clinic’s prices are high enough (thanks to strong marketing and a good range of higher value-added services) and costs are well dimensioned, the business will have a decent profit margin and will therefore be more profitable.
• Asset turnover. Asset turnover indicates how efficiently the clinic is using its investments: does the clinic generate a lot or very few sales in proportion to the investment in clients, inventories, equipment, installations, and so on? The higher the sales generated by an investment, then the more profitable the overall company. For instance, the impulsive, ill-considered acquisition of expensive diagnostic equipment that will not receive intensive use is one of the most common ways of limiting the profitability of a veterinary clinic.
• Financial leverage. This indicates the proportion of internal resources (assets) or borrowed capital (debt) a clinic uses to finance its investments. If a business increases this parameter by taking on more debt, it will be more profitable for partners; however, if a reasonable limit (which is very hard to determine) is exceeded, the risk of being unable to meet debt repayments increases considerably if income falls.

Managing a veterinary clinic: monitor liquidity ratios for successful business management

What exactly does liquidity mean? It refers to a clinic’s ability to deal with short-term payments.

• The current ratio compares the company’s current assets with its current liabilities.

Current ratio = current assets*/current liabilities**

*Cash that is immediately available or assets that can be converted to cash within 12 months
**Debt that is due to be repaid within 12 months

• The cash ratio is a more radical measure of liquidity, as it compares only cash that is immediately available (cash and banks) with current liabilities.

Cash ratio = cash*/current liabilities

*Cash immediately available at any given time

• The cash ratio in payable days compares the cash available against the total payments the clinic faces on a daily basis, and measures how many days of payments the company could handle with its current cash availability.

Cash ratio in payable days = (cash/total costs) x 300

Whenever any of these three indicators, alone or in combination, shows a negative trend, alarm bells should start ringing because the company’s economic viability may be at risk. Veterinary clinic managers must determine the frequency of these calculations (every 3, 6 or 12 months), as isolated calculations do not usually provide enough information.

Original text:
PERE MERCADER, DVM MBA
@pmercadervms

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