Problems with cash flow can cripple small businesses as well as large corporations. Every firm has fixed costs, most of which must be paid on a monthly or quarterly basis. Utilities, payroll, insurance, mortgages and other loan obligations are due and payable regardless of the amount of revenue earned.
For equine veterinarians, the amount of drugs and medical supplies purchased typically vary according to the season, but these invoices must be satisfied as well. Not having adequate cash to pay the bills is a source of stress that can paralyze a practice owner.
Most small businesses experience cash flow problems from time to time. These cash flow shortfalls can arise from a variety of reasons ranging from a large account falling behind in payments to a seasonal variation in revenue production. Due to the seasonality of equine veterinary practice, practice owners might sometimes need to borrow money to meet financial obligations during slow times. Unexpected events such as an injury or loss of an associate could also occur and could decrease revenue sharply.
Secure a Business Line of Credit
One common option for obtaining these funds is to secure a business line of credit (LOC). A business line of credit is an arrangement between a financial institution, usually a bank, and a customer. It establishes a maximum loan balance that the bank will permit the borrower to maintain. A line of credit will charge interest as soon as money is borrowed, and like most loans, borrowers must be approved by the bank through an examination of the borrower’s financial position, credit rating and/or relationship with the bank. Once the line of credit is established, the borrower can withdraw funds at any time, as long as the cash does not exceed the maximum set in the agreement.
Cash flow troubles can stem from poor financial planning, lack of good financial policies, non-compliance with such policies, poor collection of accounts receivable, inadequate fee increases, loss of revenue, failure to capture whole revenue, erratic inventory management and theft or embezzlement. Each of these alone or in combination can be devastating to a practice.
Financial Planning for Better Cash Flow
Financial planning includes having a yearly budget that projects your expected revenue and expenses for the next 12 months. Having annual and monthly totals can be of great help in managing the cash coming into the practice. If there are larger sums expected to be due in certain months for insurance, taxes or medication purchases, practice owners can reduce distributions if necessary to ensure adequate funds are available.
A budget is easily prepared from the previous year’s QuickBooks profit and loss statements, which can be exported to an Excel spreadsheet.
By thinking about how revenue and expenses are likely to change in the coming months, the practice owners can approximate what is likely to occur in the near future. Comparing the actual results to the budgeted amounts allows necessary adjustments or perhaps permits a larger owner profit distribution than anticipated.
Day-to-day operations require an uninterrupted supply of cash (capital). While the optimal thing to do is save enough money to weather these times, good planning includes obtaining a line of credit to provide a ready source of funding to keep a business running smoothly. Be sure to make an application for a line of credit while the practice is in a comfortable financial position in order to easily qualify for the credit.
Financial Policies to Manage Cash Flow
Some practices do not have written financial policies that specify how clients will be invoiced and their payments collected, but these are very important to develop and follow. Payment at the time of service is one of the most effective ways to ensure good cash flow because it avoids the accumulation of accounts receivable.
Each client should sign a written acknowledgment of the practice’s financial policies. This paperwork also offers an opportunity to collect patient information, instructions in the event of an emergency when the client cannot be reached, and an authorization to safely store a credit card number and use it in paying for care.
Equine practices traditionally sent monthly invoices and collected the amounts due months to years later;
that is a poor business practice. Veterinary practices are neither charities nor banks—they are valued, important community members that will cease to exist to serve their patients if they don’t get paid in a timely fashion.
Non-compliance
Non-compliance with existing financial policies is quite common. Owners of practices are often the worst perpetrators. They might fail to collect on invoices that are due, give discounts or undermine the efforts of their staff to get bills paid in a timely way. Because associates don’t have this leeway, clients might favor “old Doc” because they don’t have to pay in full or on time, or maybe at all.
When practices have large amounts of accounts receivable aged over 90 days, non-compliance with policies is often the cause. Practice owners must “walk their talk” and “model the way” as good leaders.
Accounts Receivable
As costs rise for pharmaceuticals, wages, gasoline and a practice’s fixed operating costs, if revenues are due but not collected, it can become harder for the practice’s accounts payable to be satisfied on time.
If clients have been accustomed to receiving invoices much later than the date that services for their horses were performed, they often have little sense of urgency in paying these bills. Accounts receivable at some level are unavoidable, but to maximize cash flow, they should be as low as possible. The best way to achieve this is to have a policy of payments at the time of service.
If big barns with lots of visits or absentee owners receive monthly invoices rather than paying at the time of service, each client should have a credit card on file. You should have authorization to run the card if you do not receive a check within 10-20 days of the invoice date. Someone at the practice should monitor the Accounts Receivable on a regular basis and promptly follow up on all past due accounts.
Monies that are aged greater than 90 days are often uncollectable. Waiting until the work slows down at the end of the year and discovering that over half of the accounts receivable is over 90 days is an unpleasant shock requiring action. Being proactive beats reactive every time.
Inadequate Fee Increases
The reality is that costs generally rise every single year. Pharmaceutical costs rise 2-3%. Fixed costs such as utilities, postage and insurance are not far behind.
In order to maintain profitability, revenues must rise every year as well. But if this increase in production comes from increased hours of work or numbers of services, other costs for compensation and the materials used in providing the services will rise as well. This will eat up much of any potential increase in profit.
Instead, the uptick in revenue must come at least in part from raising fees every single year. Even a modest amount of 2-3% will make a difference. If five or 10 years go by without a fee increase, the practice might have very little profit. Therefore, it will struggle to pay adequate wages and have little money left for monthly bills, much less equipment purchases or raises. In that case, making necessary fee adjustments to bring the practice back into financial health will be large enough to generate concern and probable pushback from clients.
Rather than face this challenge, simply raise fees by at least 2.5% every six months. Or, raise them 5% at the beginning of each year.
When inflation reaches 8% and gas prices are over $5 per gallon, a more robust price increase is indicated.
Revenue Problems
When a practice loses associates, or a doctor is injured or retires, it can lead to a decrease in revenue if other veterinarians cannot pick up all the available work. If the expenses associated with employing that doctor fall sufficiently, and the revenue can be maintained, profit might actually rise. But more commonly there is a noticeable dip in revenue and profit when the workforce shrinks.
The practice’s fixed expenses depend on a certain cash flow being earned each month. Therefore, a practice owner might end up short of money to pay monthly bills.
Keeping a three-month emergency fund is good business. Maintaining disability insurance to replace wages in the event of injury is wise.
Another way revenue leaks away is through failure to capture all services and dispensed items on invoices. It can also occur from giving client discounts. These actions can cause serious deterioration to cash flow and should be strongly avoided.
Inventory Management
As the second-largest expense to a practice, the cost of inventory can challenge cash flow. Keeping a robust amount on the pharmacy shelves to avoid running out or being caught short in backorder situations can tie up large amounts of cash.
Before that inventory is invoiced to a client after being used for services or sold, the practice might need to pay the distributor that delivered the goods. Large distributor bills can accumulate, straining practice finances.
Your inventory is valuable, so keep it locked up and count it regularly. The items to count most frequently are those that are expensive or easily sold if stolen (e.g., Adequan, Legend). Use a system to check off all inventory used in services or dispensed each day. This helps you restock and also assures you that these items land on an invoice. When inventory disappears or doesn’t get paid for, cash flow will suffer.
Know Your Turn Ratio
Knowing the practice’s “turn ratio” can help determine whether there is too much inventory. A practice should aim for eight to 12 turns a year, the equivalent of 30-45 days of inventory.
It’s simple to figure out your inventory turnover. Using your balance sheet from January 1 and December 31 of the same year, add the value of your inventory at the beginning of the year plus the value of your inventory at the end of the year. Then, divide by two. This is your Average Inventory.
The total cost of yearly drug and medical supply purchases found on your end-of-year Profit and Loss Statement divided by the average inventory equals your inventory turn ratio.
To determine the days of inventory on hand, simply divide 365 days by inventory turns.
Theft or Embezzlement
Profitable practices can fail due to lack of cash if the owners drain profits for personal use and do not reinvest in the practice or leave enough for operating expenses. Typically, these practices must borrow money in order to operate. This creates a practice with a heavy debt load and possible difficulties with repayment.
If practice owners are not taking excessive distributions, the practice is busy and the clients are paying—but there is not good cash flow—this might be an indication of embezzlement.
You might believe that it is unlikely to impossible that an employee is stealing from you. However, it is sadly quite common.
Impact of Fraud and Theft on Cash Flow
In 2011, a Veterinary Fraud Survey was conducted by Dr. Marsha Heinke with 183 well-managed practice owner respondents. Of the practices surveyed, 67.8% had been the victim of fraud, theft or embezzlement. In 60.5% of incidents the fraudsters were identified but not prosecuted.
The average duration of fraud was 12.2 months, and 63.9% of fraudsters had been employed in the practice for three years or less.
Systems and methods that reduce the chance of loss or embezzlement are called internal controls. They include all measures to ensure against errors, waste and fraud, whether accidental or deliberate.
There is inherent risk in having one person with all the responsibility for physical management of receipts of money, records of receipts and recording of payments in client accounts. No one person should handle all phases of a transaction from beginning to end. This is one of the best ways to deter embezzlement.
Take-Home Message About Cash Flow
Having the ability to forecast the practice’s cash flow in the coming year can be very helpful in managing practice finances. Over a few years, a practice owner can begin to make accurate projections as the seasonality of revenue and financial obligations are demonstrated.
Creating a chart of monthly cash inputs and outputs can be of great value in assessing financial health.
Managing cash flow is essential to maintaining a healthy practice.
