Practice Management
Equine Veterinary Practices Growing in Profitability
The overall profitability of the U.S. equine practice rose during the past decade, according to a study presented at the American Association of Equine Practices (AAEP) 69th Annual Convention in San Diego.
Profitability as a percentage of revenue rose from 12.66% in 2012 to 17.93% by 2023, according to John Chalk Jr., CPA, JD, CFP, BBA, of Trinity Portfolio Advisors of Southlake, Texas.
Trinity Portfolio Advisors, a financial planning and wealth management firm, in 2012 created financial statement benchmarks to enable equine practice owners and managers to evaluate their financial performance, Mr. Chalk said.
The firm updated these metrics using the fiscal year 2020, 2021 and 2022 financial data of 23 different equine practices from across the country. The firms ranged in size with some ambulatory and others hospital based. Each year of financial data analyzed topped $100 million.
The goal of developing financial benchmarks was to provide equine practices with “some kind of simple way for you to calculate the value of your practice,” Mr. Chalk told his audience.
Mr. Chalk explained that the analysis found that profitability as a percentage of revenue for equine practices rose because both staff costs and administrative expenses decreased during the decade:
- The administrative costs for facility and equipment changed significantly, dropping from 10% of revenue in 2012 to 8% of revenue in 2023.
- The cost for people dropped even more, decreasing from 44.5% of every dollar collected in 2012 to 40.78% of revenue in 2023.
The compensation for professional staff was 21.65% of revenues in 2012 and 21.716% in 2013, a drop of only 6 basis points, which is not a significant move, Mr. Chalk said. “I would continue to say the standard in equine veterinary medicine is the professionals are going to make about 22% of the total revenue of the practice.”
However, the compensation for lay staff dropped from 15% in 2012 to under 12% in 2023, Mr. Chalk said. “I think that’s partly because you have become efficient with your lay staff. If you can through technology or through other efficiencies reduce that lay staff a little bit, then that’s just more profit going to the bottom line.”
In his analysis he formulated the metric of EBITDA, which stands for earnings before interest, taxes, depreciation and amortization, for the equine practice industry. EBITDA is widely used by businesses, bankers and financial analysts to compare a company’s financial performance to others in the same field and to evaluate the firm’s profitability.
“EBIDTA is sort of a shortcut to here’s how much cash the practice generated after we’ve paid all the people, all the drug costs, all the rent,” Mr. Chalk said.
For the equine veterinary practice industry, the new study determined that the EBIDTA benchmark is now 17.93%, he explained.
“In the old [2012] study, about 12.6% of every dollar was left over for you to decide what you were going to do with it,” he said. “But now, because people costs have come down and facility and equipment costs have come down, the new benchmark in terms of EBITDA— profit margin —is at 18%. So, 18 cents of every dollar you collect is going to wind up in the bottom line of your income statement.”
With that benchmark, practice owners will have to decide what to do with that revenue, he added. “Do I want to buy new equipment? Do I want to buy a new truck? Do I want to take it out in profit distributions?
“Expenses in an equine veterinary practice can be categorized into cost of professional services, administrative expenses, facility and equipment costs, payroll and employee costs, as well as interest, tax, depreciation and amortization expenses,” Mr. Chalk wrote in the study presented at AAEP.
Mr. Chalk highlighted some of the findings in his study.
In computing the revenues and expenses of the 2021, 2022 and 2023 fiscal years, the analysis found that total revenues in the equine veterinary practice industry grew from 2020 to 2023 at a rate of 31.47%, Chalk said,
The total costs of professional services dropped slightly from 27.12% in 2012 to 27.05% in 2023, Chalk said, noting that the decreases of only 7 basis points means that 7-cents of every hundred dollars of revenue is insignificant, which he said he found interesting.
The greatest expense item within professional services costs in the equine veterinary practice industry is drugs and supplies, Chalk said the analysis determined. “On average, the cost of drugs and supplies accounts for 21.03% of total revenue,” Chalk wrote in his study. “Since 2012, the expense of drugs and supplies has increased by 0.70%, from the 2012 benchmark amount of 20.33%.”
He said that although drugs and supplies were the largest costs within professional services, the slight increase as a percentage of revenue is not enough to worry about.
The study determined that, “according to the 2023 equine benchmark, the costs of administrative expenses now account for 6.28% of total revenue. This is a 0.73% increase from the previous benchmark. The majority is attributed to increases in the expense of collections and bad debt and sales and miscellaneous taxes.”
He noted that these increases in expenses are shared by other industry and reflect higher use of electronic payments and tax increases.
“Rent went from just under 6% of gross revenue to just above 4% of gross revenue, I think because most practices own the real estate where they’re working, which I always encourage.”
Mr. Chalk joked: “One of my taglines is you should own the dirt where you work.” MEV