Mar 1, 2017 by Edward L. Blach, DVM, MS, MBA
The two biggest opportunities to improve profitability in most practices are to reduce labor and inventory costs. Labor costs typically account for 30% to 50% of revenue in most practices, depending on the structure of the practice. Inventory and related services such as radiology and laboratory costs account for 15% to 35% of revenue in most practices, depending on the structure and type of practice.
For every $1 million in revenue, every reduction of labor and inventory as a percent of revenue, increases profitability, assuming that savings isn’t lost or invested somewhere else. Every 1% reduction in costs and complementary increase in profitability equates to $10,000 in added profits. A 5% reduction in costs would yield $50,000 of added profit for every $1 million in revenue. For a $5 million per year practice, this would equate to $250,000 of added profit.
Since practices are valued based largely upon a multiple of earnings or profit, reducing labor and inventory costs can dramatically increase the value of the practice as well. If the practice is valued at 6 or 7 times earnings, that $250,000 in added earnings could add as much as $1.5 million to $1.75 million in practice value.
Manage your labor and inventory costs closely. Improve your profitability. Grow the value of your practice!