5 Ways to Improve Your Bottom Line: Part 2: Payroll

In Part 1 of our series on 5 Easy Tips to Increase Your Net Income, we discussed the ways to benefit from reducing your cost of goods sold and tracking your inventory.  Here, in Part 2, I’m going to give you some tips on controlling what is probably your biggest expense:  Payroll.

If you’ve established a veterinary practice, you are, by definition, a compassionate person, and you probably think of your employees as family – the last thing you want to do is reduce your workforce in order to save money.  For that reason, I will touch on some ideas that should be considered before using desperate measures.  You must, however hard it is, keep in mind that you are running a business first and foremost, and you should expect your employees to perform their duties at least in the manner you have outlined, and hopefully, documented.  If you are lucky and astute enough to hire the right people, you will be able to surround yourself with skilled and loyal employees who you will have the joy to work with for many years.

Here are some tips for keeping your payroll costs from getting away from you:

Hire well:  Employee turnover is expensive.  There are the financial costs and the hidden costs, the ones that  don’t show up on your financial reports:  

  • Training:  How many hours does it take to train a new employee?  While your current employee is training the new one, it’s pulling her off her usual duties, and she may even be clocking overtime.  Multiply that by how many new employees you go through, and the cost soars.
  • Employee Taxes: Federal Unemployment taxes are capped at the first $7000 of payroll, which means that if you keep the same employee for the whole year, you don’t have to pay the tax after he has reached $7000 in payroll.  If you hire three different people, you get to start over each time.  State Unemployment taxes and Disability Taxes have similar caps as well.
  • Employee Morale:  Your employees really hate it when you hire someone who cannot catch on to the job duties or keep up with the routine.  One bad apple can truly spoil the whole bunch and the work atmosphere and performance can suffer.
  • Your Morale:  Knowing you have to terminate an employee is unpleasant and draining.  No matter how many times you’ve done it, it never gets easy.

So how do you hire the right people?  By doing the due diligence of reviewing resumes, and checking references, checking references, checking references.  I know, I’ve done it – I’ve fallen in love with a candidate who I thought was a perfect fit, only to find out that she was much better at interviewing than working.  By checking with past employers, and asking “If you had the opportunity, would you re-hire this person?” you can find out a lot of information.  You may not get an emphatic “No!”, but a long stretch of silence is very telling.

Another way to find good employees is by recommendations from current employees.  No one wants to work with friends who they know won’t be a good fit – it reflects badly on the one recommending them.  Most of my best employees have come from this source.

Recruiting firms, while expensive, do the screening for you, and carry a guarantee of satisfaction.  Temp agencies, again, while expensive, offer an easy out if the person doesn’t work out.

My final words on this subject is something I learned over many years of hiring and dismissing employees:  It’s all about the attitude.  You can train someone with a good attitude and the proper experience to perform a new skill, even if they’re not a perfect fit for the particular position you are filling.  But never, ever hire anyone who has a personality which clashes with your work environment, no matter how skilled or qualified he is for the position.  I’ve hired the better suited candidate whom I didn’t particularly like, and it has never worked out.

Bonuses rather than raises:  We’ve all done it – you award a generous raise to your employee(s) for a job well done – maybe they helped land you a new contract. You don’t want them to look for another job, plus, they know you’re getting more money, so why not share the wealth?  But what happens when you lose a current client, don’t get a contract you really expected, or business just sort of tanks for a while, like it has during the first six months (so far) of 2020?  It’s much harder to “take back” a raise and reduce employee pay because you’re not doing as well as you expected.  To show your appreciation for a job well done, a bonus is often in order, because it’s a one-off.  You have the funds at the time, and you really do want to spread the joy.  Your employees appreciate a bonus and the recognition and gratitude that come with one.  Remember, you are the owner of the business and while your employees share in the workload, they do not share in your risk, and probably wouldn’t want to, so it’s not a good habit to associate their pay with your acquisitions.  They don’t expect you to, anyway.

One more comment on raises:  there is nothing wrong with giving out periodic merit and cost of living increases, and you should review everyone annually.  However, you do not have to give a raise to everyone, every year if you can’t afford it.  

Incentive programs: Veterinary practices often offer structured commissions to their vets, through base salary plus percentage of production (ProSal).  Without going into the pros and cons of awarding commissions for paying your vets based on billings, it is very common in the industry, and ensures that everyone is compensated for increased revenues.  There is ample information about this on the AAHA website at www.aaha.org.

For your techs and receptionists, it’s a win-win to pay them commission on sales of products you offer.

 When employees leave: It happens often that when an employee voluntarily leaves, you wonder if you really need to replace him.  Particularly during the pandemic, business owners who had to furlough employees are reassessing their needs regarding how many people they really need to successfully run the operations.  When you lose a worker, it’s best to step back and determine if the job can be done by remaining employees without undue burden.  If you do hire a replacement, it’s also a good time to re-think your pay rates if you felt that you weren’t getting your money’s worth.  

Use a payroll service:  There are still those of you holding on to running your own payroll, but it’s a time-consuming task and you probably hate it.  You can maintain control without having to do the grunt work by having your bookkeeper provide you with timesheet approval reports, which allow you to keep an eye on your employee hours and overtime.  Your time is better spent generating the income you went into business to do.

Hire a manager/administrator:  It sounds odd to hire a manager in order to save on payroll, but this is a long-term investment that will pay off in the long run, both financially and emotionally.  With growth comes growing pains, and when you find yourself bogged down with financial, administrative, and employee decisions, the joy of having your own veterinary practice will quickly fade.  For purposes of payroll, a manager will be able to help make necessary decisions and have the difficult conversations with staff that you find unpleasant and frankly don’t want to be involved in.  Keeping yourself at arms distance, even if the big decisions are ultimately yours, provides you with a buffer that is necessary to run an efficient business.

As a growing veterinary practice, your payroll costs probably account for the highest expense on your profit and loss.  It is essential that you analyze your payroll KPIs monthly in order to keep costs from getting away from you and make small tweaks regularly rather than find that you have to make painful choices down the line.