Veterinary Cash Flow
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Veterinary practices often find that though they are busier than ever, the veterinary cash flow is extremely tight. Growth absorbs cash. This is a factor often overlooked by business owners until the "crunch" is already well developed. In order to prevent the crunch it is necessary to examine the factors of each individual business that affect cash flow.
Each business has its own "cash portrait". If you are running a city practice where most customers are bringing pets, and paying at the point of sale, you will have a different cash portrait to a practice specializing in zoological or equine pursuits.
Whilst it may be true that trade customers are more profitable, they do not engage you without the expectation of credit terms. Lets for example suppose that you give credit terms to trade customers of 30 days. You will find in practice that most take at least 40 to pay, and it is not uncommon for trade customers to settle in double the allowed time.
In the meantime you have to continue to trade as normal. This means buying the appropriate supplies. In a Veterinary practice this is usually in the form of treatment drugs, and ensuring that suitably qualified staff are in place to deliver a satisfactory treatment.
As the nature of each call cannot be pre determined, and it is necessary to have the appropriate drugs standing by at the point of visit, this calls for a stock of drugs to be carried in each vehicle.
Most businesses nowadays move along at quite a pace, as technology pushes the boundaries of what is possible ever further. Veterinary practice is no exception, and having the latest developments available as treatments ensures that the customers’ perception of the practice’s treatments as effective and cutting edge remains intact. The economic value of this cannot be underestimated.
Equally, not having the appropriate treatment available at the time of a call out (which may damage the practice reputation or create a customer perception of disorganization or lack of preparation) known as “Stocking out”, or having old or obsolete stock is not good.
This situation may lead to compensatory behaviour such as ordering in bulk to take advantage of trade discounts (How often have we been encouraged to do that by the supplier?) When one considers the high price of drug stocks, the wide range that are required, and the fact that they have use by dates, then it soon becomes apparent where the money is tied up. Worse still, over ordering, and as a consequence having unused inventory that has expired is quite literally money down the drain. Ultimately, the holding of any inventory has consequences for the veterinary cash flow.
In the meantime of course, we’re still waiting for the payment from the customer.
If the practice is doing well, the consequences of appointing a new vet with suitably equipped field vehicle will yet again tie up cash.
Tackling these problems is not impossible, and as with most things, prevention is better than cure.
Making sure that you have appropriate veterinary cash flow controls in the business - is the first step. An appropriately qualified individual within the practice should be appointed as responsible for financial matters, and understand the dynamics of what it means to appoint new staff, both in terms of cost, and cash impact.
You can get an understanding of your working capital requirements by computing your working capital ratio. This will help you identify how much veterinary cash flow you need for your level of business.
Every business has a rate of growth over which it will stretch the financial resources too thin, and it is therefore necessary to understand this level and plan accordingly. You may want to ensure that adequate working capital financing is in place through a working capital solution such as factoring or invoice discounting.
Making sure that debts are collected on time, and having a tight grip on expenses goes a long way towards reigning in cash flow problems. Scrutinizing Prices and Gross profit margins to make sure they are at expected levels, is as much to do with running the business as is treating a sick animal. These are all disciplines under the heading of working capital management which all of the most successful businesses focus on.
For further information in respect of finance issues, I recommend you check out the remainder of this website, and the veterinary specific website http://dvmnewsmagazine.com
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