THE BUSINESS OF PRACTICE: WORDS OF WISDOM FROM EVERYDAY PRACTICE


Table 5. Expense to Salary Ratio of New Associate’s Position Year 12345 111,029


Associate’s cost, $ Associate’s salary, $ Expense-to-salary ratio


57,422 1.93


115,352 57,422


2.01


122,505 62,594


1.96


131,024 68,853


1.90


135,771 72,296


1.88


expenses to the employee and the substantial ex- penses incurred by the employer associated with mileage reimbursement in an ambulatory setting.


8. Conclusion


The improved methodology for calculating ex- penses provided by this paper, specifically the im- plementation of an ABC system for a more accurate assignment of shared expenses, should allow for a more precise forecasting of the cash flows expected to be generated by the hired asso- ciate. Based on the owner’s financial return re- quirements, the exact salary compensation and style that will deliver this requirement can be determined so as to provide the potential associate with a best-case scenario that is still a sound financial decision for the business. Although business owners should do their best to support the professional and financial needs of our new colleagues, new associates should not expect their financial situation to be subsidized by the shoul- ders of existing practices. In any well-run busi- ness, business decisions should be made for the primary benefit of the practice’s equity and debt holders. And as the high expense to salary ratio of our case example shows, the high overall cost of the associate’s position makes it difficult to provide a high salary compensation that will completely satisfy the new associate’s desires. Prospective associates should perform their own


analysis regarding the viability of that specific practice’s job offer to meet their personal financial needs. A hiring project that provides a positive NPV


and an IRR equal to, or greater than, the owner’s required risk-adjusted rate of return will present an attractive investment opportunity for the prac- tice that will provide the basis for a sound finan- cial decision. The conclusion that the investment opportunity is an overall sound decision, however, will be dependent on the owner’s ultimate combi- nation of financial and nonfinancial goals. Any acceptance of an unfavorable investment opportu- nity, as presented through a reduced rate of re- turn, must be seen through the eyes of financial compromise delivered by the reduced workload for the owner and, hopefully, the increased level of work-life balance that the reduced workload should provide.


Appendix 1


Case example of activity-based-costing (ABC) imple- mentation for assigning cost of goods sold (COGS) and overhead (OH) based on fictional numbers and percentages. Practice’s revenue  $500,000, COGS  35% of revenue and overhead  20% of revenue. When certified veterinary technician (CVT) is differentiated from fixed OH, OH  14% of revenue and CVT expense  $30,000  6% of reve- nue. Total neonatal work carries a 61% COGS and


Table 6. Generalized Activity-Based-Costing Implementation for Assigning Cost of Goods Sold and Overhead Expenses to Different Revenue Generation Subdivisions Within the Practice


Revenue, $


Generalized ABC COGS (35%), $ Generalized ABC Overhead (20%), $


Net ABC cash flow before other expenses, $


Neonatal Work Mare Work X-Ray Work General Work Total 22,750


7,963 4,550


10,237


68,650 24,028 13,730 30,892


47,500 16,625 9,500


21,375


31,100 10,885 6,220


13,995


170,000 59,501 34,000 76,499


Table 7. Detailed Activity-Based-Costing Implementation for Assigning Cost of Goods Sold and Overhead Expenses to Different Revenue Generation Subdivisions Within the Practice


Revenue, $ Detailed ABC COGS, $


Detailed ABC Overhead (14% of revenue), $


Neonatal Work 22,750


Mare Work 68,650


9611


X-Ray Work 47,500


6650


General Work 31,100


13,878 (61% of rev) 13,730 (20% of rev) 1,805 (3.8% of rev) 10,885 (35% of rev) 3185


4354 2687 40,809 30,045 13,995 Total


170,000 40,298 23,800


Detailed ABC CVT ($30,000), $ 3000 (10% of CVT) 4500 (15% of CVT) 9000 (30% of CVT) 1866 (CVT is 6% of rev) 18,366 Net ABC cash flow before other expenses, $


87,536 AAEP PROCEEDINGS  Vol. 62  2016 557


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