Reader question of the week: What is a good target percentage for ‘Gross Profit’ (referring to the IMPH Data Dashboard)?
One member asked the question, “What is a good target percentage for ‘Gross Profit’? This is a great question.
First, this question comes from the data dashboard on ismypracticehealthy.com. The data dashboard is a tool intended to provide a rapid view of the relative financial health of the practice. It uses eight data points that are relatively easily attainable for any practice owner or manager, and the data points represent some of the highest impact areas of every practice, labor and cost of professional services (COPS - inventory costs, radiology, laboratory, feed and bedding, etc), which are the two largest expense categories of virtually every veterinary practice. By focusing your attention to these areas, you can have maximal impact on improving profitability and practice valuation.
The metric, Gross Profit, as defined in the dashboard chart is calculated as:
(Total Revenue - (Total Payroll + COPS))/Total Revenue
This metric, Gross Profit, is analogous in our service businesses to gross profit calculations in a product-oriented business, as it measures the amount of revenue that is left after subtracting the cost of producing and delivering your service.
The target for a healthy practice for Total Payroll costs is between 30% and 40% of revenue, depending upon the make-up of the practice. The target for COPS is approximately 15% to 20% of revenue. Therefore, the total of Payroll plus COPS would be about 45% to 60% of revenue. Thus the target for Gross Profit, as defined in the above manner would be the difference between 100% and the range of 45% to 60% of revenue, or between 40% and 55% of revenue.
This Gross Profit would then be made up of Net Profit and the other remaining operating expenses of the practice not included in Payroll and COPS.
Again, the dashboard is intended to provide you a rapid look at the health of your practice, so if this metric or any other metric on the dashboard is significantly outside of your established targets, then you will need to drill down further into those areas to determine why. This is similar to a red light on your car’s dashboard. If it appears, you may not know what the problem is, but you know that you should seek further information to diagnose the reason for the warning on your dashboard as soon as possible.
In future blogs, we’ll discuss the difference between Net Profit or Earnings and Gross Profit.