Practice Tip: Practice Profit and Economy of Scale

There’s much talk as to what profit is and how much a practice should be generating. Profit is defined as “The amount received for a commodity or service in excess of the original cost.” (Dictionary.com) So it’s basically what’s left over after paying all the expenses – the original costs. And this includes your two different expenses: 1. your Fixed Expenses, i.e. your rent, mortgage payment, insurance etc… and 2. your Variable Expenses, i.e. your DVM costs, staffing costs, supplies, etc… those things you use more of the busier you get.

When a practice is small, your fixed expenses are a large percentage of your gross income and thus eat heavily into any left over profit. In many cases, a practice grossing under 500K, after paying yourself DVM compensation of 25% (the high end of the scale but good for easy math), will have no profit. Your cash flow gets very tight because it’s profit that is needed to pay off bank loans, purchase new equipment and build inventory. In contrast, as a practice grows and “scales up” and the fixed expenses stay the same you find profit magically appears. So it goes without saying that a practice grossing 750K per year will have more profit than the 500K but less than the 1.5M practice. Anything above the 1M and you should be nicely into a 20% profit above your DVM compensation.

The basic phenomenon occurring here is known as an Economy of Scale. An Economy of Scale is the reduction in cost per unit resulting from increased production and efficiency.

The bottom line is that your practice needs to grow to the “next level” to be profitable . This is not just a nicety but necessary for you as a practice owner to realize some personal income above and beyond your DVM salary. Practice ownership should have this reward.