Get Your Geek On: Analyzing Return on Investment

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return on investment

“Have I got a deal for you…”  

The sales pitch is recognizable: a new piece of equipment, a breakthrough technology, or a great bargain that comes with the promise to make you faster, better, and smarter or to bring more patients, more revenue, and more money through your door and into your pocket.  

Perhaps the payment is reasonable from a cash flow standpoint. Maybe it’s a piece of equipment your practice needs. As a business owner, you face decisions that affect the long-term viability of your practice. Knowing the numbers and making honest assessments about equipment acquisitions goes a long way in securing the future of your practice.

“You must analyze not only the demand for a new piece of equipment, but the skill sets of the practice to utilize the new equipment,” explains Jeff Sanford, director of entrepreneurial studies at the University of Georgia’s Small Business Development Center and veterinary practice consultant.

Sanford details an example of a new radiograph machine for dental X-rays: if a clinic does fewer than five dental examinations per month, a new machine probably isn’t worth the investment. However, as the standard of care moves toward digital dental imaging, radiograph machines are becoming a popular investment. If a large portion of patients receive dental care at a clinic, or the clinic wants to expand to a more advanced standard of care, dental imaging equipment can be a good investment.  

Understanding Return on Investment

Sanford’s example is fairly cut-and-dried. However, with more expensive equipment, or for equipment that falls outside of basic patient care, how can you ensure you’re making a sound choice?  

James Waldsmith, veterinarian and president of Vetel Diagnostics, lays out two main considerations when making an equipment or technology decision: first, do your competitors have the equipment? Will business be lost to a competitor if the equipment in question is not acquired? Secondly, will the equipment grow the practice? Will it increase the efficiency and precision of the diagnosis? Will the equipment encourage staff retention and recruitment?  

Waldsmith’s rubric provides a good starting point. Cost, financing options, length of use, and return on investment are perhaps the more intensive questions to consider. This article will explore several important factors when considering equipment and technology investments.  

Timing Is Everything

Joe Stephenson of Simmons Veterinary Practice Sales and Appraisals writes that a feasibility analysis can provide the information needed to estimate return on investment.  

Stephenson’s example considers a $50,000 piece of equipment, a five-year loan at 8.5 percent (interest costs of $11,550 over the life of the loan), as well as a 35 percent tax savings on depreciation (which takes initial cost down to $32,500). With these factors in mind, the starting cost is $44,050. Additionally, include costs of installation and training ($1,000) and service ($2,000), bringing the initial cost up to $47,050. Cost per year, then, is $9,410.  

With the cost per year, now you can calculate the cost per use. Stephenson says you should be conservative. If this investment is an upgrade to current technology, perhaps you’ll estimate 200 uses per year, bringing the fixed cost to $47.05 per use. By adding in variable costs such as material ($2 per use) and personnel ($20 per use), you’ll bring the total cost per use up to $69.05.  

Calculating cost is the first step. But in order to make an investment profitable and worthwhile, you must know how to put a price on it.  

Pricing: Passing Costs on to Customers

“It’s really hard to implement something new and cool if you’re not willing to price it,” Sanford says. “Pricing strategies are all in your head. Not charging for the additional services provided by new technology or equipment is a mistake.”

He explains that a clinic’s mentality toward pricing strategies will determine the profitability of an equipment investment. If a practice charges $300 for a canine dental but does not increase their prices with the addition of a digital radiograph machine, the investment will be less profitable in the long run. He adds that as technology has improved, making exams and procedures faster and more efficient, he sees many vets failing to charge for procedures like dental X-rays because the X-rays don’t take as long to run.  

Sanford suggests considering two factors when determining pricing: what is the cost of the equipment, required supplies, and the time to learn and utilize the technology, and what is the volume of procedures?  

Stephenson’s example expands on these factors. He explains that you should plan to work up to your estimated uses per year, perhaps starting with 75 in year one and increasing to 200 in the final years of financing. To calculate revenue, subtract variable costs per procedure from your markup price (between 50 and 100 percent). Then, multiply that figure by the number of procedures per year. You can calculate this estimated revenue for each of the five years and then average it. Once you have an average revenue per year, you can calculate return on investment: take average annual revenue and subtract average annual expense, resulting in average annual gain. Take the average annual gain and divide by average annual expense for ROI.

Waldsmith adds that pricing strategy is a reflection of the practice’s philosophy and management.  

“Some practices prefer to count everything from a cost-benefit basis; others, a larger view as to how a purchase can reflect benefit for the entire practice,” he says. “The veterinary client is usually looking for positive case outcomes that they understand and feel are a good financial value. They are generally more focused on the total cost to produce a clinical outcome and are less concerned with itemized bills.”   

Labs: Run Them In-House or Ship Them Out?  

Another aspect of the ROI discussion is the decision whether to process lab work in-house or use a lab service. John Younker, DVM and owner of Common Companion Veterinary in Atlanta, details his decision-making process regarding lab expenses: as a smaller, newer practice, Common Companion (and other small clinics) lack the volume needed for competitive price negotiation.  

“It’s a game we have to play,” Younker says. “[An equipment decision] all has to do with volume and negotiation.”  

Most lab contracts, Younker explains, require a minimum number of labs processed per month for a lower price per lab test. If a clinic can’t meet the volume requirement, they’ll pay a higher fee per lab test. Younker chose to acquire lab equipment to process sick cases in-house. Aside from the equipment, he has a subscription for a predetermined number of rotors each month — whether he uses them or not. He explains the decision about lab work processing as an exercise in efficiency management: trying to use up the rotors on hand while also using an off-site lab service at the lowest rates possible.

What’s the Funnel?

When making purchase or lease decisions on equipment or technology, the final verdict follows a bit of a funnel procession: in short, what money, time, training, and potential business go in the top, and what revenue, improved diagnoses, quality of care, and profit come out at the bottom?  

Younker details his decision-making process: a piece of equipment costs X (including financing costs). He then determines the market rate he could charge for the procedure, multiplied by the number his practice could complete in a month. Then, he’ll divide the cost by the revenue for each month, which tells him, roughly, how long it will take to pay off the equipment. If a piece of equipment will be obsolete in five years and paid off in five years, Younker says, he wouldn’t make the acquisition.  

“If the investment leads to further business, it makes sense to purchase,” Younker says. “If a piece of equipment requires too much additional training or supplies, it might not be worth it.”

What’s the Real Cost?  

Additional training can be a major pitfall to new technology, says Waldsmith. If veterinarians and staff are not adequately trained to use the new equipment, or the ongoing training requires too much time for a busy staff, an acquisition may go south.  

Younker says he considered ultrasound technology for his practice. While the service may have been a nice addition for his clinic, he knew the amount of training needed was significant — not reading a textbook, but focused, off-site training over several months. On top of the training, Younker explains, he questioned the volume level for his practice, as well as whether or not he’d feel confident in his interpretation of the results. Additionally, he considered pricing strategy: if he couldn’t charge a higher rate, would it make sense to offer the service to his patients as a general practitioner, or would he be better off referring the patient to a specialist?  

“I decided that if I communicate and educate the customer regarding the reasoning for seeing a specialist, I won’t lose their business as their general practitioner veterinarian,” Younker explains.  

Offering superior care, even if it means referring patients to another business, means more than offering services and technology with which you aren’t completely confident.  

Quality of equipment is an important factor. Waldsmith explains that entry-level equipment, while more affordable, may not provide clear images — a problem for veterinarians and technicians. If the device is not predictable, veterinarians and staff will lose confidence in its diagnostic abilities. Purchasing a bargain model, Waldsmith says, results in a piece of equipment that might become obsolete more quickly, diminishing its financial value to the practice as well as sacrificing the quality of diagnoses.  

“Many therapeutic devices that promise pain relief and other curative results fail to produce the expected clinical outcomes,” Waldsmith says. “As compared to other healing arts, veterinary medicine does not have the same level of oversight and regulation. This seems to allow for devices which are clinically unproven but have a good marketing campaign to gain entry into the veterinary market.”  

Read the Fine Print

When purchasing or leasing equipment, know all the details.  

Waldsmith explains: “Many practitioners fall for the ‘Sign up for X service for five years, and we’ll make the payments on a new [piece of equipment] for you.’ There are no free lunches.”  

Read the fine print, Waldsmith continues. Many of those agreements require a minimum purchase per month. If you fail to meet the purchase requirement, you may be required to make the lease payment. Or, you may be locked into a service agreement but not the price of that agreement, leaving room for the vendor to raise prices of servicing or supplies during the length of the agreement.  

Additionally, a blog post from Veterinary Practice Made Perfect explains some pitfalls of leasing equipment. For capital leases with the option to purchase the equipment at the end of the lease period, make sure you know the date of the last payment, as some leasing companies won’t inform you, but rather will continue to send payment notices. If you overpay on the lease, you may not be refunded or have the additional payments applied to the purchase cost of the equipment. Utilize your practice management and calendar software to stay on top of the lease arrangement.  

The blog post goes on to explain that leasing should be the last resort. If the end goal is ownership, leasing is often the most expensive path.  

By knowing your commitment and obligations, you can save headaches and money while advancing the standard of care in your practice.  

Remember: It’s a Mix of Business and Medicine

Veterinarians who are also practice owners are forced to make sound business decisions. However, patient is first and foremost.  

“I also consider what are we doing for the best medicine, not just the bottom line,” Younker explains. “If a piece of equipment will ultimately lead to the best outcome for the patient and it helps the bottom line, it’s a win-win. We can all be excited about that.”

2 COMMENTS

  1. It can be a little challenging when it comes to upgrading rather than offering something new. How long do you hold out for the latest and greatest?

  2. Good points! Some aquisitions can be fuzzy to figure out the numbers for, though. You don’t always know until you try.

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