AAHA-AVMA FinancialBooklet2020 V2
FinancialStandardizationIN VETERINARY PRACTICESWhy It Mattersand How to Do It
Contents1Introduction: Why Financial Standardization Matters2Objectives for Using the AAHA/VMG Chart of Accounts4Voice of Experience: Why Budgets Make VeterinaryProfessionals Nervous9Voice of Experience: Switching to the StandardizedChart of Accounts11How to Make the Switch12Voice of Experience: Better Medicine and Better Profits18Step-by-Step Guide to Converting to theAAHA/VMG Chart of Accounts20Voice of Experience: Challenges of Not Switching to theStandardized Chart of Accounts21The Next Gold StandardThis booklet is a joint effort of AAHA and the AmericanVeterinary Medical Association (AVMA) and is intended as aprimer to get you started on the path to becoming a financiallyhealthy practice. AAHA and the AVMA wish to thank thefollowing for contributing their expertise to this booklet:Cammi Bailey, CPA, CVABridgette Bain, PhDMeghan S. Bingham, CVPMTracy Dowdy, CVPMGlenn Hanner, CPA, CITP, CVA, CGMADebbie K. Hill, CVPM, SPHR, SHRM-SCP, CCFPTerence M. O’Neil, CPA, CVAMatthew J. Salois, PhDBeth Scott, CPAChristine Q. Shupe, CAELink V. Welborn, DVM, DABVP, CCRTAmy Williams, MBA, CVPMScott Zimmerman, CVPM
1INTRODUCTIONWhy Financial Standardization MattersVeterinary medicine faces a changing landscape.Embracing that change can bring opportunitiesfor veterinary practices brave enough to knowwhere they stand financially and how to use thatinformation to transform their work.Benchmarks, profitability, and economic stabilitymatter—both for individual practices and for theprofession as a whole. Of course, it is up to eachveterinary practice to decide for itself what systemfor recording financial data works best for it.However, to the extent that more practices collectand use the same standardized financial data, thesample size for economic research grows and theinsights drawn from the data are more likely tobe reliable and meaningful. It’s long past time forthe veterinary profession to compare apples toapples financially. What we think we know aboutthe economics of veterinary practice from currentdata sets may not be indicative of the 30,000companion-animal practices in the United States.Being busy and having full appointmentschedules aren’t reliable indicators of financialsuccess. Actively inputting, assessing, andimproving financials using the AAHA/VMGChart of Accounts (aaha.org/coa)—an effort thatwas initiated and coordinated by the AVMAEconomics Advisory Research Council usingpreviously created materials from AAHA andVeterinary Management Groups (VMG)—givespractices the chance to know what’s what, findways to leapfrog their all-time bests, and maybeeven jump ahead of the competition. At the veryleast, it gives practice leaders the ability to buildpractice value rather than simply cover costs. Yes,that means budgeting, but it also means muchmore—especially for any practice that will be soldin the next 5 or 10 years.Running a veterinary business without detailedfinancial visibility means you’re flying fromappointment to appointment like a rocket withGO, YOU! If you’re already using the AAHA/VMG Chart of Accounts to standardize and monitoryour financials, congratulations! Keep up the great work.Please share this information with your friends and colleagues who currently use other systems.Please also share with them your successes and tips for navigating any snags. The more practicesthat do what you’re doing, the better it is for the profession and for all the patients we serve.Others need your leadership and encouragement to take this important step.THANK YOU FOR RISING TO THE NEXT GOLD STANDARD!
2no trajectory coordinates. You may be doing allthe clinical things, being a doggone hero at everyturn, but with only a vague idea about what’sreally happening on the dollars side. That lack offinancial visibility can come as a real shock—atragedy, even—when practice owners want toretire and only then realize where the practicetruly stands. It could be the difference between anonexistent valuation, a 2 million valuation, oran 8 million valuation, not to mention profits notrealized in the years leading up to retirement.Being good at the business side of veterinarymedicine is good for business and for yourpatients. The only way to afford state-of-the-artfacilities and equipment, the only way to attractand keep stellar team members, and the onlyway to deliver outstanding patient care is to netenough money not just to survive but to thrive,so that the practice lives on into the future. Onlythriving practices enjoy the financial and strategicbreathing room to see opportunities when changescome knocking.IT’S YOUR DECISIONDecide right now to pivot your practice’s financialsto use the most updated and standardized AAHA/VMG Chart of Accounts that’s specifically designedfor companion-animal practices.Commit to checking financials at least monthly,and to using key performance indicators (KPIs) todefine where things stand now as a place to start.Look at your data for areas in need of attention,and work on improving your practice a little bit ata time.Objectives for Using theAAHA/VMG Chart of AccountsComparison with Human MedicineIn the 1970s, the American MedicalAssociation (AMA) copyrighted its CurrentProcedural Terminology (CPT) to standardizea vocabulary for coding medical services andprocedures to improve reporting, accuracy,and efficiency.This process of establishing and adoptingan enterprise-terminology strategy allows forindustry-wide data collection, metrics, andbenchmarking. It’s essentially what veterinarymedicine is doing now with the AAHA/VMGSimply put, a chart of accounts providesa framework for categorizing income andexpenses in a systematic way that makesfinancial data consistent and usable for reportingand assessment. A chart of accounts that isstandardized and used throughout a givenindustry provides greater benefit by makingbenchmarking with similar businesses possible.A standardized chart of accounts gets everyone onthe same playing field, talking the same language,and coming out with data that can be used inactionable ways. It provides a road map for findingopportunities for improvement and growth.Chart of Accounts.The AAHA/VMG Chart of Accounts isthe standardized chart of accounts for
3companion-animal practices. AAHA, the AVMA,and many other key opinion leaders encourageevery veterinary practice to begin using this chartof accounts as soon as possible. It’s that important.Fundamentally, the AAHA/VMG Chart ofAccounts gives you a way to make sense of moreof the numbers that genuinely affect practicesuccess. It also provides financial guardrails, so tospeak, that give early warnings about any changesin income and expenses before they cause biggerissues. Over the years, far too many practiceowners have focused too much on revenuewithout sufficient consideration of expenses,Being good at the business sideof veterinary medicine is good forbusiness and for your patients.including cost of goods and services and thevarious complexities of labor costs and owners’compensation beyond salary.Instead of only looking at money coming in andmoney going out, effective use of a standardizedchart of accounts lets you match a specific revenueline item with its associated expenses on a oneto-one basis. It’s a bit like matching up socksafter doing laundry. For example, if the pet foodmarkup is a certain percentage, pet food revenueshould reflect that same markup. If it doesn’t, thensomething is not right.One such “something’s not right” example comesfrom a real practice. Once practice leaders realizedthat pet food revenue was less than pet food costs,they investigated and figured out that staff weretaking food home to feed their own pets. Without
4Voice of Experience: Why Budgets Make Veterinary Professionals NervousEntrepreneurial Spirit. The veterinary profession isprofit is an end goal, all practices must be profitableproud of its strong entrepreneurial spirit. Figuringto sustain themselves. Without adequate moneythings out and doing things ourselves seemsto hire a quality team, get them trained, pay fornatural. Veterinarians chose animal medicine assupplies, and keep equipment up to date, practicesa career, not accounting. While partnering withwill wither and eventually close their doors.a strong financial adviser is wise, having a clearunderstanding of basic finances is critical. ForThe essence of veterinary medicine remainsexample, the excitement of a new practice andcentered on public health. This responsibilitythe resulting steady growth trend make it easy tocan get lost in the day-to-day stress of managingpresume the practice is doing well. Many havea practice. Pet owners rely on veterinarians tofound that “busy” is not the same as profitable.educate them about good pet care for longer,healthier lives for their pets but also to minimizeOnly by having some standard measure canpotential zoonotic threats. Rabies vaccinationspractices compare their results with those ofare more than a line item on an invoice. It isother similarly sized practices. Using the samecritical that everyone on the veterinary teamdefinitions for each revenue and expense categoryunderstands that the health recommendations foris vital to getting good information. Whenpets are more than a moneymaking scheme.attempting to understand surgical efficiency, it’shard to know what’s what when one report lumpsIt Takes Everyone’s Help. It can feel as if theanesthesia, surgical meds, and the actual surgeryresponsibility of running a profitable practiceinto one category, and another report breaks theseis only on the practice owner and managementitems into more specific or different categories.team. However, the person who answers theHaving a standardized chart of accounts is criticalphone and decides whether to encourage thefor accurate measurement whether in veterinaryappointment, the person who reinforces thepractices or any other small business.doctors’ recommendations for patient care, andthe person who makes sure everything done forPerfectionism. Budgets are not the norm in thethe pet is charged out and the money collectedveterinary world. As perfectionists, the thoughthave a much larger role in the practice’s financialof missing the mark can cause practice ownershealth than management. Practice owners andand managers not to attempt a budget or not tomanagers are now dependent on those in thetrack financial data with a deeper level of detail.trenches to make or break the financial plansCreating plans is the foundation for perfectingfor the practice. Training on charges is sorelythe ability to hit goals, and budgets are merelymissing in many practices. A lot of time is spentthe plan for the financial areas of the practice.talking about vaccine protocols and fleas, whichare both important, but getting paid for that workShy About Profits. Clients often strike out atis critical, and training for that task needs toveterinary practices about money issues. The sadhappen with the initial new hire and with regularreality is that the veterinary profession tends to shyreview and coaching.away from profitability goals. While it is unlikely that—Debbie K. Hill, CVPM, SPHR, SHRM-SCP, CCFP
5running reports for these financial numbers indetail, they never would have known what washappening. Monitoring the numbers, matchedone to one, gave the practice a possible point ofinquiry, a place to start looking for answers.Using the detailed categories in a chart of accounts,rather than lumping everything into drugs andsupplies, gives you the microscopic view of yourfinances necessary to understand what’s happeningand how it compares with your own prior numbersand profession-wide benchmarks. The AAHA/VMGChart of Accounts provides an opportunity forcompanion-animal veterinary businesses to assessfinancial performance in many ways: By tracking month-by-month outcomes for KPIs By comparing with the same time periods yearover year or month over month By comparing results with all-time bests forthe practice By knowing how an individual practice stacksup against industry averages and idealsClients often strikeout at veterinarypractices aboutmoney issues.The sad reality isthat the veterinaryprofession tendsto shy away fromprofitability goals. By knowing how a practice compares withsimilar practices By understanding how data from highperforming practices differ, thus providinginsights for improvementIf your practice sets any of the following goals,then switching to the AAHA/VMG Chart ofAccounts may be very useful: Control costs more effectively and strategically Grow clientele Be a better steward of the income youalready have Optimize what you’re doing through targetedstrategies and continuous improvement Attract and keep top-notch team members inall roles Reinvest in your local community through theeconomic development created by the business Support charitable causes Provide veterinary access and better medicineto your community
6Because here’s the thing: The difference betweennetting 10% profit and 20% profit usually meansbetter-paid and happier employees; bettertechnology, which allows for better medicine;and better continuity of care so that service toclients and patients goes on uninterrupted. Somepractices struggle to find people to hire and keepenough staff to handle a normal appointmentschedule and serve clients. People rely onveterinary practices to be successful so thatveterinary care is always available to them whenthey need it for their pets.CHART OF ACCOUNTSDEFINITIONSWhile many of the high-level categories in theAAHA/VMG Chart of Accounts are similar tothose in other charts of accounts veterinarypractices may currently be using, the fielddefinitions that go along with the AAHA/VMGChart of Accounts provide the details so thateveryone is putting the same revenue and expenseitems into the same categories. The goal? No moreguessing about what goes where.You may not love where various items get tallied inthe standardized chart of accounts, but understandthat the definitions—these universals—came fromyears and years of work and consensus buildingamong veterinary practices and industry thoughtleaders on key financial issues. Trust the workof your peers and the wise counsel of financialand accounting experts. For example, vaccinerevenue goes into a professional-services revenuesubcategory (5001) rather than pharmacy revenue(5100) or what you may have always thought of as“drugs and supplies.”
7Tip: Keep the PDF that details the chart of accountsdefinitions on your desktop, and use the searchfeature within the PDF to quickly find whichnumeric code to use.Several suppliers and distributors already codetheir invoices to match the AAHA/VMG Chart ofAccounts. Rather than having to figure out and keyin each invoice to the right codes, you receive amonthly summary by chart of accounts code.BETTER BUDGETINGUsing the standardized chart of accounts alsomakes budgeting easier. Rather than startfrom scratch, let your current financial data, asorganized by the chart of accounts, tell you whatyour current spending looks like. Once you knowthat, it’s much easier to figure out your goals for abetter and more profitable budget. Gone are thedays of assuming everything is OK if you still havemoney left in the checking account at the end ofthe month.Plus, better budgeting sets the stage forunderstanding KPIs and improving yourbenchmarks going forward. If you have a budgetand are measuring with the most detail you can,then you can more easily see changes in thebusiness over time. With that knowledge, youstand a better chance of achieving practice success,however you define it.Using the chart of accounts and a living budgetallows practices to be detailed and intentional withaccomplishing goals. For example, right after theTrust the work of your peers andthe wise counsel of financial andaccounting experts.
8Betterbudgeting setsthe stage forunderstandingKPIs andimproving yourbenchmarksgoing forward.winter holidays, practices typically experience aslow period. That’s probably not a good time to seta goal of increasing wellness revenue by 20%.BENCHMARKS MATTERA benchmark is simply a way to measure wherethings currently stand on a particular revenue orexpense category or as a percentage of revenue.Benchmarks provide keen context for how apractice’s outcomes stack up. Cost of goods andservices as well as labor expenses are critical toknow, for example. It’s easy to be working hardand have too much product on the shelves andexcessive staff costs, but it can be difficult todetect that this is happening without makingcomparisons with benchmarks for these expenses.Paying attention to details within subcategorieslets you determine gross profit margins. Drops inthese categories can alert practice leadership topressures from price visibility from online sellersof things like parasite-control products or dietsas well as other issues within the practice, such asrising cost of goods sold.PROTOCOLS FOR QUALITYCARE AND PROFITABILITYAll this financial information provides necessarydetails for team-wide conversations as well asfor coaching individual team members. In manycases, red flags in KPIs can be directly related toquality of care and the ability of all team membersto fulfill their roles for practice success. For
9Voice of Experience: Switching to the Standardized Chart of AccountsDearborn Animal Hospital is your normal small-We wanted to know where we would seeanimal practice with its own way of doing things,the most benefit as well as areas we couldafter 70 years serving the community. With suchmaintain the amount of detail from oura long history, change is always hard but alwayscurrent chart of accounts.happening. The current owner has been leadingour hospital for 10 years. Five years ago, we builtand moved into our new hospital and earned3. Create a budget, starting with income andexpense goals for the new year.4. Start plugging budget numbers into theAAHA accreditation. These upgrades sparkednew chart of accounts based on the fieldunimaginable growth, so when the new chart ofdefinitions provided. This was all doneaccounts came out, I knew that we needed tobefore the actual transition.switch to remain on the cutting edge.5. Gather the team’s input on the budget,based on the new chart of accounts.We looked at it from many angles and laid out a6. Revisit the draft budget toward the end ofplan to transition over a period of time. I did initiallythe fiscal year. We looked at where thingsconsider the band-aid method—“Just do it andwere falling into place, made a couple ofrip it off.” Ultimately, though, a slower approachlast-minute revisions to the budget, andallowed me to introduce it piece by piece. This gavecalled it good.us time for input and questions so that we couldhead off any resistance to the change.We wanted to be precise about our reasons formaking the switch. For us, the following goalsstood out: Better track costs and, of course, income.(The new chart of accounts was much morecomprehensive than what I designed nineyears ago.) See where we could improve business inmore detail. Benchmark our hospital with others withapples-to-apples comparisons. Take the challenge to look at current KPIs7. Finalize year-end numbers with our CPAusing our current chart of accounts, thenset up the new budget with the new chart ofaccounts. (Yes, we will not be able to pullhistorical data in the same format as the newchart of accounts, but we asked ourselves,“How often do we really go back and crunchold numbers?”)As we began the new fiscal year with the newchart of accounts, we had a lot to learn about thenew codes and definitions, but the new chart ofaccounts is laid out in a way that makes it easyto learn the new account codes. The trick wasgetting the old numbers out of our heads.and find places to pay more attention.I’m sharing our experience just over six monthsOur Process1. Set a timeline of on
least, it gives practice leaders the ability to build practice value rather than simply cover costs. Yes, that means budgeting, but it also means much more—especially for any practice that will be sold in the next 5 or 10 years. Running a veterinary business witho
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