Business and Management

Question 1

What are stakeholders?

Answer 1

People and organisations in the internal and near external environment that have a legitimate interest in the activities of the practice and a direct impact on it. The relationship is mutual – the practice can, in its turn, impact or influence these people and organisations. Stakeholders’ interests often conflict – part of a practice-owner’s role, and in veterinary businesses the vets because of the autonomy afforded to professional practice, is to try to balance these conflicting interests.

Question 2

How can veterinary business be classified?

Answer 2

• Size – big vs small
• Premises – multiple sites vs single site
• Clinical area – general practice/first opinion practice vs referral/second opinion practice, small animal vs farm vs equine
• Ownership – independent vs corporate, owned by people who work in the practice vs owned by shareholders

Question 3

What are the 4 main types of business structure in the UK?

Answer 3

Each has various tax and liability implications for owners and shareholders:

1. Sole trader
2. Partnership
3. Limited liability partnership
4. Limited company

Question 4

What are the veterinary business types?

Answer 4

• Sole principal/trader
• Traditional partnership
• Limited liability partnerships
• Limited companies
• Charities

Question 5

What are the advantages of a larger business?

Answer 5

• Economies of scale - larger customers have more buying power with suppliers. Some practices join together in ‘buying groups’ to give them the power of size
• Non-clinical expertise: HR, health and safety, IT, tax, legal, advertising

Question 6

What is practice income?

Answer 6

Income = Sales = Turnover = total revenues (income) over a specified period of time (usually a financial year, i.e. 12 months)

Question 7

What are the sources of income?

Answer 7

• Consultations
• Diagnostic procedures, treatments (medical and surgery)
• Preventative medicine
• Sales of drugs, food, pet supplies
• Work for external companies e.g. RSPCA, PDSA

Question 8

What are the practice costs?

Answer 8

• Direct costs: drugs and medicines, surgical materials, lab tests, clinical waste disposal, locums, cremations
• Overheads: Staff costs: include gross salary, employer’s NICs, pension, training and CPD, any work-related benefits. Other costs: rent, rates, water, light and heat, insurances, telephones and Internet, subscriptions, marketing, stationery, motor & travel, legal and professional fees etc.

Question 9

What is the profit equation?

Answer 9

Sales – Cost of Sales (i.e. Direct Costs) = Gross Profit

Gross Profit – Overheads = Net Profit

Sales – Total Costs = Net Profit or Loss

Question 10

How can a practice increase profit?

Answer 10

By increasing sales, reduce costs and a combination of these 2.

Increase sales – 2 key performance indicators (KPIs):

Average Transaction Value = total revenues ÷ number of transactions and Footfall = Number of visits per client

Question 11

What is a transaction?

Answer 11

Transaction – any time a client purchases something from the practice so may not necessarily be a consultation. Could be a retail sale only (e.g. pet food).

Average transaction value (ATV) = total revenues ÷ number of transactions

Question 12

What do vets do that decrease income?

Answer 12

• Don’t apply charges properly
• Discounting based on perceived amount that client can pay
• Will talk about the 2 above in year 3
• Don’t educate clients about veterinary Wcosts and therefore clients don’t insure animals
• Don’t practice good medicine
• Increase footfall
• Reduce costs

Question 13

How can footfall be increased?

Answer 13

• Vaccination reminders and follow up if owners don’t book in
• Geriatric pet checks more frequently than once a year – things can change quickly in older pets
• Book in a second consultation at the time of the first one rather than saying ‘come back for a check-up’ – if the patient should be seen again then it should be seen again and this is not left to chance
• You are the vet – if the pet needs a dental offer to book it in there and then not leave it open

Question 14

How can costs be reduced?

Answer 14

• Salaries – biggest expense, so first to be targeted for cuts – BUT is there slack in the system?
• Drugs and medicines – next biggest expense – a direct cost, so the more vets do, the more the cost will increase.
• Overheads – some costs are not directly controllable, e.g. rent, council tax, water, insurances – can shop around for alternative suppliers, can make savings

Question 15

What is the vision statement?

Answer 15

A declaration of the desired state, or where a business wants to be. It is articulated in the future tense.

Question 16

What is the mission statement?

Answer 16

Is about the business core purpose, why it exists and is articulated in the present tense. It provides a strategic perspective for the business.

Question 17

What is business strategy?

Answer 17

Business strategy is essentially the choices that a business makes about how to achieve their objectives.

Question 18

What is strategic analysis?

Answer 18

• How to make the vision and mission into an actionable plan
• Models/frameworks are used to assess the current situation and explore future direction
• Internal and external market forces are considered
• Porters five forces is one method used to assess competition: Threat of new entrants to the market, Bargaining power of suppliers, Bargaining power of clients, Threat of substitute products, Degree of competitive rivalry
• Assessment of competitive strategy
• Porters generic strategies of competitive advantage: Cost Leadership, Cost focus, Differentiation Leadership, Differentiation focus

Question 19

What is business lifecycle?

Answer 19

1. Start-up/Existence
2. Survival
3. Success and options
4. Take off/growth
5. Resource Maturity

Question 20

What is innovation?

Answer 20

• Innovation is putting new ideas or approaches into action.
• Innovation should create or add value by either improving existing goods, processes or services or developing new products, processes or services

Question 21

What is enterprise?

Answer 21

• Enterprise has many different meanings when used in different contexts.
• Most simply (in the business context) enterprise it is another word for a forprofit business.
• Enterprise is more usually associated with entrepreneurial ventures. In the sense it describes the actions of a person who shows some initiative by taking a risk and setting up, investing in and running a business.

Question 22

Distinguish entrepreneur and intrapreneur.

Answer 22

• An entrepreneur is someone who designs and launches a new business
• An intrapreneur is an individual who uses entrepreneurial skills to create and develop a new project in the company that they already work at
• Both entrepreneurs and intrapreneurs have a drive to innovate where-ever they seen an opportunity. They possess (or learn) leadership and adaptability skills.

Question 23

Distinguish financial and management accounts.

Answer 23

Financial accounts report the financial position of a business in a regulated way to external creditors, investors and lenders.

Management accounts create organisational goals through measuring, analysing, interpreting, communicating and through managers.

Question 24

Distinguish financial and managerial accounting.

Answer 24

Financial accounting – the process of recording, summarising analysing an entity’s financial transactions and reporting them in financial statements to its existing and potential investors, lenders and creditors.

Managerial accounting – the process of identifying , measuring, interpreting and communicating information to management to assist them in planning, decision making and risk management.

Question 25

How are financial and managerial accounting similar?

Answer 25

• Both branches of accounting
• Both involve collecting financial information and presenting it to their target audience in the form of financial reports

Question 26

What are the differences between financial and managerial accounting?

Answer 26

• In financial accounting, the target audience is external and is internal in managerial accounting
• Financial accounting is more focussed on reporting past transactions and events and managerial accounting is more focussed on future transactions and events
• Financial accounting scope is broad and managerial accounting is much more narrow
• Financial accounting has the focus of being objective and precise and managerial accounting has the priority of being timely and relevant.
• Financial accounting is more regulated than managerial accounting, as managerial accounting has confidential reports

Question 27

What is a profit and loss statement?

Answer 27

The income statement that summarises the revenue, costs and expenses incurred in a period looking backwards.

Revenue – expenses = profit or loss

Gross profit percentage = (gross profit / turnover) x 100

Cost of drugs and disposables as a percentage of turnover = (cost of sales / turnover) x 100

Net profit percentage = (net profit / turnover) x 100

Staff cost/turnover = (staff cost / turnover) x 100

Question 28

What is a balance sheet?

Answer 28

Balance sheets are financial statements, part of the statutory accounts prepared for reporting, the statement or financial position. It is a snapshot that cannot be used to assess trends and can be compared to previous years statements.

The balance sheet has what is owned (assets) and what is owed (liabilities and equity) on either side. These totals are equal.

Question 29

What is a cash flow statement?

Answer 29

• Money coming in and going out
• Healthy profit does not mean a healthy cash flow
• Profit is the amount of money left once total costs are deducted from turnover
• Cash flow is a measure of the business’s strength and liquidity
• Cash from operating activities
• Cash from investing activities
• Cash from financing activities

Question 30

Why is cash flow important?

Answer 30

Cash flow is important because it is how much money the business has available at any given time. Cash is the lifeblood of any business to pay for employees, suppliers, taxes and lenders.

Question 31

Define assets.

Answer 31

An expenditure that has utility through multiple future accounting periods.

Question 32

Define current assets.

Answer 32

All assets of a company that are expected to be conveniently sold, consumed, used or exhausted through standard business operations with one year.

Question 33

Define fixed assets.

Answer 33

The long-term tangible assets used by the business to generate cash flow and maintain business activities.

Question 34

Define liabilities.

Answer 34

Legally binding obligations that are payable to another person or entity.

Question 35

Define current liabilities

Answer 35

An obligation to repay amount within current accounting year of an individual or an organization.

Question 36

Define long term liabilities.

Answer 36

An obligation that will not be paid off in the current year or accounting period.

Question 37

Define balance sheet capital.

Answer 37

Money available for immediate use, whether to keep the day-to-day business running or to launch a new initiative.

Question 38

Define capital assets.

Answer 38

Assets of a business found on either the current or long-term portion of the balance sheet. Capital assets can include cash, cash equivalents, and marketable securities as well as manufacturing equipment, production facilities, and storage facilities.

Question 39

Define debt capital.

Answer 39

A business can acquire capital through the assumption of debt. Debt capital can be obtained through private or government sources. Sources of capital can include friends, family, financial institutions, online lenders, credit card companies, insurance companies, and loan programs.

Question 40

Define equity capital.

Answer 40

Can come in several forms. Typically, distinctions are made between private equity, public equity, and real estate equity. Private and public equity will usually be structured in the form of shares. Public equity capital raises occur when a company lists on a public market exchange and receives equity capital from shareholders. Private equity is not raised in the public markets. Private equity usually comes from select investors or owners.

Question 41

Define working capital.

Answer 41

Includes a company’s most liquid capital assets available for fulfilling daily obligations. It is calculated on a regular basis through the following two assessments:

• Current Assets – Current Liabilities
• Accounts Receivable + Inventory – Accounts Payable

Question 42

What are the equations for working capital and current ratio?

Answer 42

Working Capital = current assets – current liabilities

Current Ratio = current assets/current liabilities

Question 43

What is the function of Key Performance Indicators?

Answer 43

KPIs helps a business focus on the areas that really matter to the performance of the business. KPIs are used in financial analysis, quality improvement, clinical governance, quality of care, safety, customer experience, human resources, and marketing.

Question 44

What are KPIs?

Answer 44

• A KPI is a standardized calculation using quantifiable data.
• KPIs reflect the performance or trends in performance of key metrics
• KPIs are a management tool
• KPIs can be measured at the level of the business, business unit, work group and at the individual level
• KPIs should reflect the performance and progress of a business
• KPIs should be able to be compared to a standard (benchmarked) or previous calculations
• KPIs should be able to be changed/influenced/acted upon

Question 45

What is measured to measure performance?

Answer 45

• Financial ratios: these tell you about the solvency, profitability and working capital of the business and are of chief interest if you are looking to invest, if the business cash-flow is poor (management) and to the bank
• Measures of sales: these are of chief interest to management and staff to assess the business performance.
• Measures of cost control: these are also of chief interest to management and staff.

Question 46

What do common veterinary KPIs include?

Answer 46

• Total practice revenue
• Net profit % (20% is the figure to aim for but many veterinary practices are operating at a net profit of 10% or less. Farm animal veterinary businesses are generally less profitable than small animal and equine businesses)
• Revenue centers as percentage of total revenue (e.g. surgery, consultations, item sales)
• Total expenses as a percentage of total revenue
• Annual transactions value per client (at least £250 annual spend per client)
• Average transaction values (commonly split to compare individual vets)
• Total active clients. (This should be around 1000 active clients per vet)
• New clients/lost clients
• First to second consultation ratios (this should be 100%)
• Revenue per full time equivalent vet (this should be 4-5 times the vets salary as a rule of thumb)
• Support staff to vet ratios
• Fee to drug sales ratios (small animal 60:40-70:30, farm animal 25:75- 50:50, equine 70:30-75:25)

Question 47

What is a financial ratio?

Answer 47

The financial ratio KPIs measure the overall financial performance of a business in terms of its ability to earn a return for its owners and ability to pay its debtors.

Question 48

What are the rates of return?

Answer 48

• Return on Sales = how much profit a business generates from each pound of total income. It reflects how well a business manages its costs, pricing strategies and client relations (ROS = net profit / revenue).
• Return on Assets = how much profit a business generates from each pound invested in the total assets of the business. It reflects how well a business manages its costs, pricing strategies and client relations to return a margin to investors (ROA = net profit / total assets).

Question 49

What are measures of solvency?

Answer 49

• Working capital = accessible resources required to support day to day business operations (working capital = current assets – current liabilities).
• Current ratio = another measure of solvency. Minimum acceptable ratio is 2. (current ratio = current assets / current liabilities).

Question 50

What are debt ratio measures?

Answer 50

Debt ratio is a measure of debt compared to equity. It is important to lenders that the business is not too negatively geared (has too much debt).Too much debt means the business is vulnerable to having difficulty in meeting interest and principal loan repayments. Too little debt and a business may not be realizing its growth potential.

Debt to equity ratio = how much capital has been invested by the business owners compared to how much the lenders are financing the business. (debt to equity ratio = total liabilities / owner’s equity).

Question 51

What are inventory turnover measures?

Answer 51

• Average inventory level = (opening inventory + closing inventory) / 2.
• Inventory turnover = the number of times the stock is turned over (usually calculated per year) the higher the number the more often the inventory turns over. This results in less outdated stock and less stock on hand. Best practice is for IT to be 8-12 times per year. (inventory turnover (IT) ratio = cost of inventory goods sold /average stock level).