Let’s face it. Most veterinarians start veterinary hospitals because they are passionate about helping pets live healthier lives — and while being able to pay student loans is important, it’s not the reason you went into veterinary medicine. Unfortunately, this also means many practice owners might not understand how to read their monthly financial statements provided by the accountant. (If your bookkeeper is not providing you with monthly financial statements, you should ask them to do so. Quarterly statements is not enough to keep track of your animal hospital finances.)

We know of hundreds of practice owners (and practice managers) who never look at their profit and loss statements because they do not understand them. While this article won’t teach you to become an accountant overnight, we do hope it will give you the basics to understand the importance of the P&L and how to read it.

First things first, what is a P&L? 

A profit and loss statement is a simple report generated by your accounting software. At the top of the P&L, you will find your gross revenue numbers. This is where all of your income shows up. As you move down, you go to the “Expenses section”. Depending on how your accounting software is set up, you will have multiple categories of expenses as well as subcategories. At the bottom of the Profit and Loss statement, you will see the words “Net Income” with two thick lines underneath the number. This is your Profit (or loss, if in parenthesis).

The American Animal Hospital Association has a model “chart of accounts”, which lists all of the ideal categories in which revenue and expenses should be assigned. You can find the sample P&L here, and more information about the model “chart of accounts” here. If you have any questions about how to implement these, ask your accountant or CPA. (And yes, you should have a CPA! Why? Send me an email and I can tell you the benefits of a CPA.)

How Does a P&L Work?

There’s actually a very simple formula for how every Profit and Loss statement operates. Your Net Income number, that’s the number on the bottom line (that’s why profit is called your “bottom line”), is derived by subtracting your expenses from your revenue (the “top line”).

Look at Revenue

If you are following the AAHA chart of accounts, you will notice that the revenue (“income”) is split into multiple sources. If your accounting software is linked to your Practice Management software, this is easier to implement. Check with your software vendor and see if the feature is included. In many cases, even if it is an extra charge for the integration, you may make up the expense by increasing your revenue, since you’ll be able to notice trends faster through the integration. For example, you can compare January 2019 to January 2018 and see exactly where your increase (or decrease) in revenue is in each segment of your hospital. If you notice Prescription Diet sales are down, you can investigate and solve it before it becomes a bigger problem.

Look at Expenses

Whenever your practice spends money, you should be tracking the expense in your financial software. The AAHA Chart of Accounts is a great resource to see the model “expense” accounts to tag expenses into. This is crucial for your practice to be as granular as possible. Why? Because the more specific you can make your expense, the easier it is to detect trends.

Let’s put this in practice to see why. 

Practice A has the following expense accounts in use: Utilities.

Practice B has the following expense accounts in use: Utilities-Uncategorized, Utilities-Gas, Utilities-Water, Utilities-Electricity, Utilities-Phone/Internet

Assume that both practices make $10,000 in production (revenue) in January and February. In January, both practices receive a $100 water bill, $5000 electric bill, and $700 phone/internet bill. In February, both practices receive a $800 water bill, $4000 electric bill, and $1000 phone/internet bill.

For Practice A, their P&L Looks like this:

January
Revenue: $10,000
Expense: Utilities ($5,800)

Net Income $4,200

February
Revenue: $10,000
Expense: Utilities ($5,800)

Net Income $4,200

For Practice B, their P&L looks like this:

January
Revenue: $10,000
Expense:
Utilities-Water: ($100)
Utilities-Electric: ($5000)
Utilities-Phone/Internet:($700)
Expenses-Total:($5,800)

Net Income $4,200

February
Revenue: $10,000
Utilities-Water: ($800)
Utilities-Electric: ($4000)
Utilities-Phone/Internet:($1000)
Expenses-Total:($5,800)

Net Income $4,200

Do you see why this matters? 

Practice B would be able to quickly identify that their water bill went up 8 times higher for February than January, which could indicate a leak. Additionally, Practice B would also be able to see that their telephone bill was $300 more than normal, which could indicate their contract needed to be renewed. Lastly, Practice B would see the 20% decrease in their electric bill, which would allow them to determine how they saved that much energy so that they can continue the trend. By having this information early on, Practice B can take action to get the higher expenses down to normal, and then try to keep the electric bill down too. Overall, if they can get the water bill down $700 in March, and the phone bill down $300 in March, while keeping the electricity usage lower at $4,000, Practice B can add $1000 to their Net Income in March, without seeing any more patients!

Meanwhile, at Practice A, because the “Utilities” expense looks normal since the increases were offset by the savings in electricity, the practice will be unlikely to take action to save on utilities until the electric bill increases to normal, and then it will be too late. 

How Do You Increase Your Profit? 

There are only two ways you can increase your profit (Net Income) number. The most common way you probably know of it to increase your Production (revenue) – (sell more products, see more patients, raise prices, etc). You can also decrease your expenses.
Let’s see this in action.

Assume in 2018, you made $550,000 in production. You had $450,000 in expenses, leaving you $100,000 in net income (profit).

If you would like to make $125,000 in profit in 2019, you either need to increase your production by $25,000 and keep expenses the same ($575,000 – $450,000 = $125,000), or you need to cut expenses by $25,000 and keep production the same. ($550,000 – $425,000 = $125,000).

Of course, in real life, expenses and revenue are not constant. Therefore, most practices will take an approach of raising revenue and decreasing expenses at the same time.

Why do Practice Owners need to Review P&L Statements Monthly

Your practice can quickly become a cash-eating monster if you don’t stay on top of your numbers. Reviewing your P&L monthly will help you identify trends before they become problematic. For example, reviewing your P&L will help you identify if your revenue decreases, so that you can figure out why. (Ask yourself what changed in your marketing, outreach, or scheduling to cause the decrease in revenue.) If your expenses increase, the P&L will help you see where so that you can renegotiate contracts or switch vendors to save money. Lastly, reviewing your numbers regularly shows your team that you care about the health of the practice. Unfortunately  in our industry, some “team members” may take advantage of an owner’s lack of concern for finances, which can lead to problems with embezzlement and employee theft. By reviewing your finances regularly, you’ll help keep honest team members honest, identify problematic expenses before they get out of hand, and learn to increase revenue in the right metrics. This can allow you to practice better medicine, invest in more staff members, invest in staff training, pay yourself an appropriate salary, and invest the profits in yourself and your hospital.