Trend Charts Liquidity and Profits

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1 Ratio Value Ratio Value Better Ratio Value Ratio Value Current Ratio: The ability to pay short term bills Trend Charts Liquidity and Profits Orca Veterinary Hospital % 8% 1% Quick Ratio: Most Liquid Assets available to Pay Bills Gross Margin: Revenue left over after costs of services and goods are subtracted 60% 82% Performance to Goal: Gross Margin is 2.5% under the Goal of 78.0% with a negative $5,574 Profit Impact over the time period. Net Margin: Percentage of revenue remaining after all operating costs, interest and taxes are paid 2% Current Ratio Quick Ratio Gross Margin 4% Net Margin 19% 45% % 9% 74% -5% 9% % 79% 17% 18% % 71% 11% -2% 76% -9% % -4% % 13% 12% 19% % 13% 8% 78% % 19% Better Better Better Performance to Goal: Net Margin is 7.2% under the Goal of 20.5% with a negative $15,718 Profit Impact over the time period. More Tutorial NOTE: Benchmark in charts is set to (Quartile) of the Veterinary Industry Information

2 The meters and bar charts plot your practice s performance for the Key Performance Metric (KPM) page of the report. Meters The meters are an indication of where your practice stands against similar veterinary practices both in type and revenue size. The right side of the meter shows the best performing practices; the top (in this case 6.0) and top (in this case 8.0) indicated in the green numbers. The left side shows the bottom performers; the lower (in this case 0.9) and bottom (in this case 0.5) indicated in red numbers. Your practices most current performance is indicated by the meter indicator arrow. The arrow changes from Red (problem) to Yellow (caution) to Green (good) based on where you stand relative to the industry. In this example the meter indicates that this practice is slightly better than the top of similar practices on the Current Ratio (sales compared to total assets). Being near or at the median (12 o clock position) is a caution as a practice should strive to be at least at the top of the industry. 2.7 Current Actual Performance Indicator Current Ratio 3.5 Industry Performance on Metric Page 2 of 6

3 Bar Charts While the KPM page provides the last three months of numerical metrics, the bar charts provide the last 11 months diagrammatically, so you can see your practice s performance trend over a rolling annual term. Reading from left to right, these bar charts include: each month s performance for 13 months in blue, annualized in grey, the goal set by you in green, and finally the top of the veterinary industry benchmark in brown; allowing for quick visual comparisons. The following set of four bar charts is for the top section of metrics on the KPM table labeled SHORT TERM RATIOS: Liquidity & Profitability. Note: For all of these charts, larger values are better. 1. Current Ratio - Liquidity = The Current Ratio, also called the solvency ratio, is a comparison of current assets to current liabilities, commonly used as a measure of short run solvency, i.e., the ability of a practice to pay its current debts as they come due. This ratio includes inventory, which can take longer to convert to cash. Potential creditors use this ratio to measure a practice's overall ability to repay short term debts (those due within one year). Page 3 of 6

4 In general, it is critical for all practices to maintain liquid reserves in the bank to cover one to two months of practice expenses to weather normal economic fluctuations. However, if your current ratio is low, two months of liquid reserves may not be adequate, and could cause you to seek borrowed funds to run the practice operations. On the other hand, if your current ratio is at the very top of the industry, this may indicate that since cash flow is strong and paying bills is not a problem, the liquidity in the bank can remain around one to two months. In this case, with a strong current ratio, excessive liquidity can be overly conservative, and some of those funds could be invested elsewhere to earn a better return. Consult your financial advisor at CPR to explore this professionally. 2. Quick Ratio - Liquidity Q k = The Quick Ratio, also called "acid test" or "liquidity" ratio, measures only cash, marketable securities (cash equivalents) and accounts receivable because they are considered to be the most liquid forms of current assets. It does not include inventory, so it is a more stringent measurement than Current Ratio of a practice s ability to generate immediate cash to run the practice and pay its bills. A Quick Ratio less than 1.0 implies dependency on inventory and other current assets to liquidate short term debt. Page 4 of 6

5 3. Gross Margin - Profitability Performance to Goal: Gross Margin is 2.5% under the Goal of 78.0% with a negative $5,574 Profit Impact over the time period. Page 5 of 6 M g = The Gross Margin bar chart reveals how much a practice earns in relation to the direct costs that it incurs for delivering services. This is simply a visual translation of the accounting formula (gross profit divided by gross sales) to compute gross margin. This is normally expressed as a percentage. Gross margin is a good indicator of how profitable a practice is at the most fundamental level. Note: Gross margin is often confused with markup which is gross profit divided by cost of goods sold (COGS). The bottom of the Gross Margin section indicates the profitability differential; where the practice is currently operating versus if it had met the set goal. In this example, there is a $5,574 negative profit impact from not meeting the goal. Conversely, this practice could have realized $5,574 more in profits by reaching the goal. There are five major areas to focus on if gross margin is low: bookkeeping errors, inventory shrinkage, poor purchasing, low productivity, or bad pricing. Each has many variables that contribute. For example, it is common to find practices that price their inventory and services to attract clients from competitors. In some cases this can be effective for commonly shopped services like spays/neuters or vaccines. However, across the board, if prices are consistently low, and/or all costs into delivering a service are not considered, profitability can suffer. Low staff productivity is another significant cause of low profits, can be very

6 complicated, and is beyond the scope of this summary. However, identifying if a practice is experiencing low gross margin and how large that opportunity is there are the first steps, and CPR offers consultants to focus in specifically on exploring these opportunities if a practice wishes for assistance. 4. Net Margin - Profitability Performance to Goal: Net Margin is 7.2% under the Goal of 20.5% with a negative $15,718 Profit Impact over the time period. M g = B T x The Net Margin is an efficiency measurement, and is a ratio (comparison) of net profits to revenues for a practice. It is typically expressed as a percentage, and shows how much of each dollar of revenue generated is translated into profits. This metric figures prominently in your practice valuation as demonstrated on the Valuation chart that is part of this report. The bottom of the net margin section indicates the profitability differential the practice is currently experiencing versus if it had met the set goal. In this example there is a $15,718 negative profit impact, or conversely, this practice could have realized $15,718 more in profits if the goal had been met. Page 6 of 6