From time to time, veterinarians purchase drugs and supplies from vendors and receive delayed billing, sometimes delayed as long as two quarters. The vendor makes the offer largely to hit sales targets set up by their finance team. The veterinarian accepts the offer to help the cash flow of the practice by enabling the practice to sell the products before payment to the vendor is required.
That is a wonderful thing for the veterinarian, right? Yes, it can be a wonderful thing for the practice's cash flow, but we have to consider the rest of the story. For the sake of an example, let’s assume that the practice purchases $150,000 of medication with 120 days delayed billing. Most practice owners are under the impression that because they don’t see the delayed billing dollars on their P&L, there can be no negative consequences to their business. Reember our discussions of the various financial statements. The often overlooked consequence to delayed billing purchases is that the practice acquired a $150,000 debt which lives on their balance sheet. Unless your practice is preparing to borrow money for and expansion or co-sign for a buy-in or buy-out the debt is probably not going to harm the practice.
In the case of practice X, a great deal of planning had been completed for a clinic remodel/expansion. The plan was for the construction work to take place during the slowest season of the practice. Although the country was in the midst of what would be called the Great Recession, the practice was performing well and needed to expand. The bank was willing to take the risk. All in all it was an awesome, well thought out plan.
Without realizing the potential consequences, the managing partner was offered an amazing opportunity to purchase medication with 120 day delayed billing. She jumped right on that, believing that the cash flow benefit would make life a little less stressful during the construction. Shortly after the medication purchase was formalized, the managing partner and practice accountant completed the last of the paper work and went to the bank to finalize the financing.
The loan officer immediately noticed the $150,000 of new debt. The bank had originally agreed to the loan in spite of the practice's existing, reasonably high, debt burden. The new $150,000 in debt pushed the risk to the bank out of their comfort zone. The managing partner received the news that the bank could no longer make the loan.
The story has a semi-happy ending. The debt was retired at 120 days and the loan was re-offered by the bank. The year delay to get to the next slow season for construction to begin left the staff working in cramped conditions and providing less than desired client experience for another year.
No part of this financial story is hard to understand. The veterinarians involved didn’t understand their financials well enough to realize the consequences of the ‘good deal’.
There is no free lunch!