The “40/20” Rule

Sep 28, 2016 by Edward L. Blach, DVM, MS, MBA

As we’ve discussed many times, inventory and related services such as lab and radiology represents an expense category called Cost of Professional Services (COPS) or Direct Costs.   In most practices, COPS represents between 20% and 30% of revenue.  Labor represents the highest expense category in most practices and is typically between 30% and 50% of revenue in most practices.

A frequent question from practice owners is:  “How much should my Labor and COPS be?”

The answer, in general, is that these should be a low as possible while still supporting the activities of the practice to provide optimum customer service and high quality veterinary services for your patients.  That said, excess labor and inventory drain profits from your practice.

To provide an answer to this frequent question, and to simplify it, we will establish the “40/20” rule.  The 40/20 rule will state that:  “To optimize profitability, a veterinary practice should strive to keep its Labor and COPS at less than 40% and 20% of revenue, respectively.  This is the 40/20 rule.”  Of course, every practice is different, and every practice owner must make decisions to serve their customers in their desired way.  These decisions will impact both of these large expense categories, and as a result, they will impact profitability as well.

Use the 40/20 rule to improve profitability.

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