Previously a doggie daycare, this room was converted into a rehabilitation center, boosting this clinic’s revenue to $10,000 per month from $1,500 per month. This is the conclusion of a two-part series on how capital purchases can be good for business. To read the first installment, click here. Does the idea of adding new capital equipment and the associate cost and time commitment to implement it seem daunting to you? The fear of money and time investment is almost always our initial roadblock when it comes to adding new services facilitated by equipment purchases. We need to look more closely at how we are spending our time and how we are investing our money. If we use the excuse that we are already busy and something costs too much, we are hurting our practice’s growth long-term. I’m already too busy… or am I? When we’re doing the calculation to determine whether a new piece of equipment is viable in our practices, we’re evaluating two main concerns as it relates to staff: 1) Do I have enough time to bring something else on? 2) Do we have enough manpower? Adding a new service takes time for staff adoption, requires attention from practice management, and ultimately requires staff time to perform the treatment. We are doing the math backward here. What we should be asking ourselves is, “What type of business are we running right now?” Consider the following: Profitability: Are the treatments you currently offer profitable? If you are busy, but not on things that make an impact on the business, maybe you are spending time doing the wrong things. Sustainability: Are the types of treatments you offer sustainable in the market? For example, do you have a multimodal pain management program, or are you counting on vaccines to sustain your business? The pain management service has more staying power long-term than the vaccines. Complexity: Simple services can be replaced easily by competitors; you should be offering treatments that require skill and are difficult to replicate by low-cost competitors or less skilled labor. Ultimately, offer treatments that require you to be a better veterinarian. Once you have taken an in-depth look at the state of your current business, you will be more qualified to evaluate whether you are busy doing things that make your business money in the short-term and keep it competitive in the long-term. Don’t get too comfortable The piece of the “I’m already too busy” argument you need to take a critical look at is related to sustainability and complexity. Sure, you’re too busy now, but how hard would it be for someone else to come in and steal your lunch? We know our profitable treatments can be replaced because we’ve already seen it happen with spay and neuter surgeries, along with pharmacy and retail. Consider this real-world example: I had a doggie daycare several years ago that I ran in 325 sf of my clinic. It was easy for me to get up and running because it didn’t require any special equipment or expert labor. It made money, but it wasn’t a significant profit center for me. What the daycare did do, however, was keep me busy and add a lot of noise! In short order, a Camp Bow Wow moved in two blocks away—demand for my doggie daycare was gone overnight. This is a perfect illustration of how easy it was to replace my service, albeit one that wasn’t really profitable to me, but was taking up a lot of my time and emotional energy. Because there is no special equipment or skills needed to create a doggie daycare, there were minimal barriers for my competition to set up shop. The addition of equipment makes it more expensive to replicate what you are doing and deters competitors who aren’t committed to long-term growth. Additionally, the investment in equipment forces you and your staff to learn a new skill, simultaneously increasing the complexity of your treatments and your staff’s skill, which also are difficult factors for your competition to replicate. We are now competing against the Walmarts of the world, not with other veterinarians. Therefore, we need to take a critical look at what we want our practices to be in the future. Do we want to offer simple services that can easily be taken away? What do we like to do that we can narrow in on and specialize in to differentiate ourselves? I chose to focus on pain management as the solution to my differentiation problem. I determined there were two main things I could do to establish myself as a leader in pain management. First, I could earn my certified clinical research professional (CCRP) certificate to master rehabilitation skills, and as a general practitioner, I could harness how to use these skills to build a pain management program in my clinic. Second, I could invest in the equipment I needed to start my own pain management-focused rehabilitation program. Increasing revenue A pain management service requires multiple patient visits and can’t be replaced by internet-based retailers. Let’s revisit the space I had previously used for my doggie daycare, which was 325 sf and brought in about $1,500 per month. When the Camp Bow Wow moved into town, I was forced to evaluate the hard facts about the business of my in-house daycare. Ultimately, I had to accept the daycare was consuming a lot of resources—and space—for a small payout. It was at that point I decided to turn the space into a rehabilitation room. Converting the daycare to a rehab space checked all the boxes: it had potential to be profitable, it required education and skill to administer treatments, and it wasn’t something everyone else in town was doing. Additionally, it was a pain management service that required multiple visits and couldn’t be replaced by internet-based retailers. Win, win, win. I took the equipment leap and invested in laser therapy, hydrotherapy, and a stance analysis diagnostic tool to get my rehabilitation program up and running. It sounds like a lot to take on at once, and it was, but I had done the profitability analysis and the numbers worked out. The space that used to make $1,500 per month turned into a real profit center for my clinic, earning $10,000 per month. All the equipment I purchased paid for itself in less than 12 months, and I gained a highly valuable—and difficult to replicate—suite of services. ROI, margins, and sec. 179 When evaluating the investment in multiple pieces of pain management equipment at the same time, there were three main topics for consideration: ROI, a margin analysis for my clinic, and the role of sec. 179 of the U.S. Internal Revenue Code. ROI: Establishing a ROI isn’t difficult once you’ve decided in what time period you want to pay it off. The best model I have come up with is to base the payback period on the number of years for which the equipment is warrantied. Based on the payback period, I can calculate a break-even point. Once I determine the break-even point, I factor in variable labor costs to perform the treatment, and what expertise is required to establish a true total cost per case. After understanding my fixed and variable costs, I factor in profitability to determine if the pricing model will be viable in my market. For example, if I am investing in a $30,000 piece of equipment and I need to pay it off in five years, my fixed overhead per month associated with the piece of equipment is $500. If each treatment takes 15 minutes and can be performed by a veterinary technician, my variable cost per treatment is $5 (based on 15 minutes of technician time if a technician is paid $20/hour) (See Table 1). Margin analysis: At my practice, our goal is to earn 15 percent net profits. When establishing a ROI analysis model, I factor in 20 percent net profit per item to allow room for discounting. We also include a 20 percent margin to cover incidental costs and to contribute toward fixed overhead. The rationale behind adding a percentage for fixed costs is that if we plan for this new segment of the business to be successful, then ultimately it should contribute to fixed overhead at a proportional percentage. Overall, with 20 percent included for profitability and the 20 percent calculated for fixed overhead, we are adding a 40 percent margin to establish the cost to the client for the treatment. For example, if I estimate I will see 40 cases per month for the $30,000 piece of equipment, the fee for the treatment charged to the client is shown in Table 1. Sec. 179: The last factor I take into account is whether sec. 179 will come into play with my purchase. If your business truly has extra income at the end of the year, you are going to pay corporate income tax on that money. For example, if your business made $100,000 in profits, you could choose to do a few things with it: 1) Move it into your 401k: If you do this, you will be taxed at a 35 percent rate, leaving $65,000 that will actually make it into your 401k account. If you estimate your return rate on your 401k of 3.5 percent, you can anticipate in a year your $65,000 will be worth $67,275. 2) Spend it on capital equipment: Based on current tax law, I’d be able to spend the full $100,000 on capital improvements in my practice and get the full value of the $100,000, not losing 35 percent to corporate tax. Based on my ROI calculator, I will be shooting for a 15 to 20 percent return on that investment. Additionally, if I lease the equipment, I have a tax write-off every year with sec. 179 for the duration of the lease. Ultimately, this approach to the investment of my $100,000 allows me to keep more money in my business, leverage a higher return rate on my investment, and minimize my annual tax burden. Further, if you are thinking about selling your practice, capital equipment can help increase your net income, which corporate buyers reimburse at approximately seven to eight times the value of your net income. Still too busy for profits? It’s an ideal time of year to take a hard look at your business and ask yourself if you are busy doing the right things. Are you building a model that is difficult to replicate and sustainable over the long-term? More importantly, do you like what you are doing and see a path in the future you want to continue walking down? If the answer is “no” to any of those questions, consider adding a new service facilitated by equipment that helps you accomplish both your clinical and financial goals. Analyze the economics of your decision, as they will have an immediate impact on your year-end tax liability. It may be time to take a step back and realign your strategy to point toward long-term profitability. Jeff R. Denny, DVM, CCRP, CVPP, is owner of Ark Animal Hospital in Liberty, Mo., for 25 years. He teaches frequently at national veterinarian conferences on the topics of laser therapy, regenerative medicine, and canine rehabilitation for the general practice. Dr. Denny can be contacted via email at jeffrdenny@att.net.
