Feb 10, 2017 by Andrew Clark
Small Veterinary businesses face different problems than larger practices. Most of these problems are related to cash availability when the bills come due. Managing cash flow problems before they become critical can help your Veterinary Business survive the lean times.
The most important issue to any small veterinary business is cash flow. It does not help a small practice to have a profitable upcoming season if there is not enough cash to cover the payroll for this Friday. Most veterinary businesses are somewhat seasonal. There are times of the year or weather conditions during which we see fewer patients. During those times, veterinary business owners and managers must be especially careful with this timing to assure that there is cash available to cover payroll and accounts payable. The coming season may predictably busy, generating enough cash to cover the practice obligations, but if the cash-on-hand in the slow periods dips into the red, a crisis may be coming sooner than your business will generate adequate cash.
The two most common approaches to managing cash flow issues are:
- retained cash from prior high revenue seasons
- line of credit sufficient to keep your cash flow healthy as necessary
Well managed, established veterinary businesses can often keep cash reserves adequate to cover expenses in lean times. Depending upon how disciplined the owner and manager are with cash, it is often best to hold your cash reserves in a separate account. This will eliminate some spontaneous purchases when you look at the total in the account, see plenty of cash and say “we have enough money for that new ultrasound.” If your cash reserves are in a separate account, out of sight out of mind, you will be less likely to spend your working cash unwisely.
In businesses with a financial historical record of cash poor seasons and in practices with management who want to be prepared for any eventuality, having an operating line of credit with a bank is a great safety net…if it is managed conservatively. Many lending institutions will set up a line of credit for your business if you do your business banking with them. There will probably be a fee to set up the operating line of credit but you only pay interest if you draw cash from the line of credit. A line of credit can act as ‘insurance’. If you don’t need the cash all you pay is the set up fee. If you need the cash, it is quickly available. You can use the line of credit when you need to cover your short-term cash crunch, but keep a close eye on your long-term profitability to ensure that unforeseen expenses do not threaten your overall financial health. Keep in mind that an operating line of credit MUST be paid in full by the end of the year.