COVID-19: putting the team first
Veterinary practice is being challenged as never before with the COVID-19 pandemic...
Published 07/05/2020
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Key to financial survival during the virus pandemic is having a basic understanding of the economics of veterinary practice, and how income, expenditure and profit are linked to each other.
Veterinary practices are vulnerable in this crisis because their high fixed costs cannot easily be adapted to the sudden drop in demand for their services.
The impact on revenue and profits will vary depending on the national rules imposed during lockdown and the type and size of the practice.
The capacity to survive financially will depend largely on the management team’s abilities to adapt and react to the situation as it evolves.
A good understanding of cash flow in and out of a business is key to controlling costs and maximizing income during the crisis.
The authors express their thanks to Antje Blättner and Susie Samuel for their contribution to this article.
At the time of writing, we are only at the outbreak stage of the coronavirus pandemic, and varying degrees of confinement measures have been in place for a different number of weeks in different countries. What will be the financial impact of the virus and its consequences on veterinary practices in the short, medium and long term? It is still too early to have a clear understanding about what will happen, but some solid evidence has already emerged: according to the recent VMS COVID-19 report, which was based on a panel of 343 veterinary practices in Spain, total practice revenue decreased by an average of 33.2% in the three-week period starting March 16th 2020, with veterinary services also showing a worse performance than product sales (Figure 1). In a separate study performed by CM Research (coronavirus survey, wave 2: What is the impact of COVID-19 on veterinary professionals and their practices?) involving 870 vets from seven countries (US, UK, Australia, France, Italy, Spain and Germany), the week of March 27th saw a considerable decrease in practice revenue against the preceding week, ranging from a minimum of -12% (in Australia) to a maximum of -62% (in Italy) (Figure 2). In any case, it is clear that this pandemic is going to generate a serious revenue loss for veterinary practices, probably anywhere between 15% and 50%, and for an as-yet unknown duration.
Pere Mercader
Veterinary practices throughout the world are at risk if there is a sudden drop in demand for their services, mainly because of what are call “fixed” costs. In most practices, the typical profit and loss structure (with some obvious variation between practice types) can be broadly split as follows (Table 1).
% of income | Cost nature |
|
Revenue | 100 | - |
Merchandise & Supplies |
20 - 30 |
Variable |
Payroll (owners and employees) |
40 - 50 | Fixed |
Overheads (premises, administration, etc.) | 15 - 20 | Fixed |
EBITDA * | +5 to 15% |
A cost is considered as “fixed” when it does not vary with the level of workload of the practice, at least in the short term (i.e., months or a year). Typical examples of this are the rent of the practice building or the size of the payroll, which will be the same (or very difficult to change) whether 20 or 100 pets enter the clinic on any given day. On the other side, the volume of goods and supplies purchased by the clinic will be more adaptable to the level of activity, meaning that if there are less clients for some weeks, the practice will buy less; these are variable costs.
Lucile Frayssinet
It is possible to alter Table 1 to show what the profit and loss structure of a clinic would look like using three different scenarios where revenue decreases by either 20%, 30% or 50%, as shown in (Table 2).
Pre-crisis situation | 20% revenue drop |
30% revenue drop | 50% revenue drop | |
Revenue | 100 | 80 | 70 | 50 |
Merchandise & Supplies |
20 - 30 |
16 - 24 | 14 - 21 | 10/15 |
Payroll (partners & employees) |
40 - 50 | 40 - 50 | 40 - 50 | 40/50 |
Overheads (premises, administration, etc.) | 15 - 20 | 15 - 20 | 15 - 20 | 15 - 20 |
EBITDA | +5 to +15 | -5 to -15 | -10 to -20 | -15 to -30 |
This is a difficult one to answer, as there is no previous experience in the veterinary sector of a sudden drop in demand as is happening currently. The outcome will depend on a number of factors:
How long can a veterinary practice resist a major drop in revenue without collapsing? Time is the critical factor here, and the answer basically depends on five variables:
The weaker a practice scores on these five points, the shorter the period it can resist a financial downturn. A sudden, significant fall in revenue combined with poor cash management, rigid labor legislation and lack of financial support could kill a practice in a matter of weeks.
When experiencing a major crisis with a dramatic fall in revenue, it is sometimes necessary to implement extraordinary measures to make sure a business can be kept alive. This means having enough cash to pay for all necessary expenses. Any business can make huge losses and still survive – or even grow – provided it doesn't run out of cash – for instance, until recently Amazon made consistently huge losses for years and yet became one of the largest companies ever.
For a veterinary practice or a small group of practices the statement of cash flow can be summarized as shown in (Box 1).
A period (which can be a day, a week, a month, a year…) starts with a certain amount of cash or cash equivalent (short-term deposits…). During this period, on the one hand, several sources will generate funds that adds to the amount of cash held, whilst on the other hand various expenses will deplete the cash. The balance of these operations explains the difference between the amount of money at the beginning of the period and the amount remaining at the end of the same period.
We usually distinguish three different sorts of cash changes:
Philippe Baralon
To be totally clear, during a crisis cash management is only a short-term therapy and any recovery strategy is not based on it, but it sometimes may be necessary, or even vital, to follow the recommendations shown in (Box 2) just to avoid running out of cash.
The main recommendations are as follows:
Recognition of the magnitude of this crisis and the very real threats that it brings to a veterinary business is essential for survival. It must be emphasized that none of the actions discussed above can cure the disease, but they can prove to be decisive in buying time in order to stay alive and implement true solutions until we can benefit from a strong recovery program once the crisis is over.
Philippe Baralon
Dr. Baralon graduated from the École Nationale Vétérinaire of Toulouse, France in 1984 and went on to study Economics (Master of Economics, Toulouse, 1985) and Business Administration (MBA, HEC-Paris 1990). Read more
Pere Mercader
Dr. Mercader established himself as a practice management consultant to veterinary clinics in 2001 and since then has developed this role in Spain, Portugal and some Latin-American countries. Read more
Lucile Frayssinet
Dr. Frayssinet is a French veterinarian who graduated from the École Nationale Vétérinaire of Toulouse in 2019. Read more
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