Why your Veterinary Practice’s Financial Statements Don’t Make Sense

You Get Your Income Statement. But Is It Actually Useful?

How does this information help you? You know your revenue, and that you spend a lot of money; yet you still don't understand what's happening inside your practice. Does it tell you how much came from professional services, pharmacy, lab work, dentistry, or other areas of the practice? This is where your chart of accounts matters.

Wait…What Is a Veterinary Chart of Accounts?

Don’t worry we're not going to go too technical. Your chart of accounts is the system your bookkeeping software uses to organize financial activity. Think of it as your accounting Dewey decimal system. There are all these different books (transactions)  and the Dewey Decimal System or your chart of accounts says, where to categorize those. You could put all of your revenue on one account or all the mystery books on one shelf. Finding a series of books would be a nightmare. With the Dewey Decimal it's easy to find a series of books from your favorite author.

The AAHA/AVMA financial standardization guide describes a chart of accounts as a framework for systematically categorizing income and expenses so the resulting financial information is consistent and usable. Your chart of accounts determines how much your financial statements can actually tell you about your practice.

Your Financial Statements Are For You.

It's easy to get lost. A lot of people think I need this for my taxes. Yeah you do need it for your taxes, but that's only one day of the year.  The other 364 is for you, and you deserve more from your financial statements than a clean handoff to the tax preparer.

Your financial statements should help you understand your practice. Your chart of accounts determines how much your financial statements can actually tell you about your business. Having a good chart of accounts can be a really big game changer to achieve that goal.

Imagine seeing, Professional Services Revenue, Pharmacy Revenue, Dietary Product Revenue, Laboratory Revenue etc. 

What is even better is that beneath those revenue areas, your costs are categorized consistently enough to understand what's happening.

Now your financial statements start looking less like a tax document and more like a picture of what your practice is actually doing.

Why Veterinary Charts of Accounts Get Messy

Few and far in between does a practice initially start using the chart of accounts from AAHA and VMG. Many don’t know it exists, and that is normal.  

Maybe you set up the QuickBooks? Maybe one of your relatives or your receptionist? And then someone adds an account lab expense. Someone added another account like outside lab, and then it just turns into this ever growing web that is so difficult to navigate, and reminds you of the junk drawer in your kitchen. It has a bunch of stuff in there, but god only knows what's in it. 

Your transactions are in there, but they're not telling you much. A standardized chart of accounts gives you the opportunity to clean that up.

A Good Veterinary Chart of Accounts Needs Useful Detail...Not More Detail

We don’t want to go too far in the other direction either. For example Amoxicillin Revenue, carprofen Revenue,  Gabapentin Revenue etc. Keeping track is what the practice management system is for.

Your accounting system and practice management system have different jobs.

The accounting system needs enough detail to show meaningful financial categories without becoming impossible to maintain and too convoluted. 

The goal is useful detail. Rather than inventing your own structure, veterinary practices can use the AAHA/VMG standardized Chart of Accounts, which was developed specifically for veterinarians.

Are We Making Money on Pharmacy?

You can have a lot of prescriptions moving, but is the product expiring and having to be disposed of? The big box chains get volume discounts, people transfer their prescription to an external pharmacy. If you only have one or two revenue categories you won’t be able to answer this important question. If you can’t tell what your earned and what it cost you to generate that revenue that can be fixed.

If pharmacy revenue is separated appropriately and related product costs are categorized, now you have something you can use. The AAHA/AVMA chart of accounts segments your transactions into meaningful categories so you can answer these questions. This is the visibility you need. 

This Isn't About Becoming an Accountant

You have enough to do, you definitely don't need to become the person entering every transaction yourself. But as the owner, you should understand what you're asking your accounting system to accomplish.

Could you look at your income statements and recognize your veterinary practice in it?

Can you see the major ways your practice makes money? Can you see the major types of expenses required to operate it? Can you distinguish meaningful areas of the business? If not, your chart of accounts may need some work.

What do I want my financial statements to tell me? Your chart of accounts is not a bookkeeping exercise. It's the foundation underneath your financial reporting. Otherwise it's garbage in and garbage out. 

Ready for Financial Statements That Actually Help You? 

At Leading Stone Financial, we help independent veterinary practice owners organize their accounting around the practice they’re actually running.

That includes establishing a chart of accounts that doesn’t make tax preparation easier...it gives you useful financial information throughout the year.

Because knowing how much revenue your practice generated is helpful. Knowing where it came from and where the money went is much more valuable. It starts with how the transactions underneath that report are organized. Need help? Connect with us here.