The 1% Difference
I have met some people that take pride in how frugal they are. Saving money is a driving force in their lives. I’m sure you know people like this. They will drive to a grocery store 5 or 10 minutes further away from where their usual store to save on some items. Or they sit and sit on the decision to buy a new piece of equipment for their veterinary practice.
I was very much like this at one point. I remember several years ago when I lived near the USA border. Gas in America is always cheaper than gas in Canada and I would often drive 30 minutes, wait at the border crossing, drive into the border town and get gas, wait at the border crossing to get back into Canada and then drive 30 minutes home. All that to save $10. One day I realized how foolish this was. My time was worth something and the extra wear and tear on my vehicle wasn’t worth it.
Unfortunately, I have met too many veterinary practice owners that have a frugal mindset when managing their businesses. Their mindset is either why spend money if we don’t have to, or let's try and maximize our profitability. These practice owners usually look at their Cost of Goods Sold (COGS), or the medications and supplies they buy. They spend a lot of time trying to save a couple of percentage points in this area. They get so focused on where they can save money, that they never look up and explore growth opportunities.
If the goal of being frugal is to make more profit there are much better and easier ways to do so with a growth mindset.
Let’s look at this simple profit and loss statement. The numbers are estimates to demonstrate my point. In this example, the cost of medications and supplies is 25% of revenue or turnover. That leaves a profit of 15%.
Next let's see what happens with our profitability if we reduce our cost of goods sold, our medications and supplies by 1%. We reduce our total Cost of Goods sold by $1,250, which goes right to our bottom line. I can see the cost-conscious practice owner smile at this.
But what happens if instead of reducing our COGS by 1% we increase our prices by 1%. Right away we increase our profitability by $5,000. Now our profit is 16% of revenue instead of 15%. And for those who are wary about raising your fees, rest assured none of your clients will notice a 1% increase. For example, an $80 routine exam fee would become $81. Not really noticeable is it?
But you insist you don’t want to raise fees. What happens if you grow your business by 1%. Perhaps you are introducing a new service, or you increase your marketing efforts. If our COGS stay at 25% of revenue we add $3,750 to the bottom line. Even if you spent $1000 on Facebook ads to get that increased revenue you are still making more money than reducing your COGS by 1%.
Obviously, reducing costs while raising fees or growing your business is optimal, but the relentless pursuit of savings misses the big picture. The amount of revenue is always bigger than all of your expenses unless your business is losing money. Modifying that bigger number, revenue will have a bigger impact than focusing on the smaller number of expenses. Think of the time spent looking for deals, or negotiating with vendors. You would need to lower your COGS by 4% to equal the profit you would gain with a 1 % price increase.
What is the one thing we don’t have enough of? Time, of course. Let's use time wisely and focus more of our attention on developing a growth mindset and enjoy the bigger impact it will have on the profitability of our businesses.