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You might guess income, profitability or assets. In fact, it's cash flow. Healthy cash flow is necessary not only to fuel the business, it also enables you to secure financing for growth and is the first indicator potential purchasers will look at when determining the price they would be willing to pay for your practice.
As such, effectively managing cash flow is essential for a healthy practice. This requires establishing a target income and planning how to use the revenue that flows in to pay bills, act on business opportunities, save for growth and build personal financial security.
By taking a hands-on role in understanding cash flow and implementing cash-preserving strategies, you control your own money and avoid unpleasant worries about having sufficient cash on hand to meet obligations. The following suggestions can help you manage cash flow and safely steer through the financial ups and downs that are part of operating every veterinarian practice.
Start by thinking of cash flow in terms of your professional and personal wish list. For the coming year, what would you most like to have happen in your practice? Expand into new treatment procedures? Purchase new equipment? Hire more staff? Pay down debt? Take more money home? Enjoy a longer vacation? Prioritize the items on your wish list and then meet with your business advisor to determine the production and collection targets that will enable you to achieve these goals. You can then project these goals into weekly patient numbers that will help you attain that income.
A good place to start is the monthly income statement. Spending just an hour each month with your bookkeeper to review this document can reveal important findings and trends.
This statement details
the revenue flowing into the business and the expenses incurred over the same period. Look at each line in the statement to reviewing each source of revenue and expense. This enables you to identify potential gaps and problematic trends and to address them before they can escalate into serious problems. Waiting until the end of the year to review is often too late to make adjustments that may immediately benefit your practice.
It's also important to track non-deductible expenses that aren't immediately written off and aren't reflected on the income statement. These include purchases of assets such as equipment, vehicles and leasehold improvements as well as principal payments on debt.
For most veterinarian practices, staffing, property and equipment are the biggest expenses. Ask your advisor for comparative statistics to evaluate how your practice compares with those of your peers in these key expense areas. If there are any significant disparities, you can then begin to look at ways to reduce costs. When it comes to staffing for example, it's important to know how much employees cost as a percentage of total office production.
As for property, be sure to carefully consider both the downsides and the upsides of owning or leasing. Purchasing a building can provide opportunities to sublet space and acquire another revenue stream. Owning a property in which you operate a business also yields tax deductions: mortgage interest, property taxes and other expenses. There are also some downsides. Purchasing property is a significant financial commitment and may affect cash flow and your ability to borrow additional funds.
Choosing to buy or lease equipment also has cash flow implications, therefore compare the potential after-tax savings of both options. Leasing enables you to deduct 100% of payments as a business expense, whereas a loan only allows you to expense interest costs and capital cost allowance. Leasing may be more advantageous when the term is less than the number of years you can write off the asset and when you can use the cash to earn a higher return than the cost of leasing.
A number of benchmarks can help you quickly monitor each month whether your cash flow safety net is sufficient to protect your practice.
Accounts receivable turnover– net credit sales / average accounts receivable
By measuring the rate at which you collect on outstanding accounts, this ratio helps you determine whether you are collecting accounts receivable on a timely basis.
Variable expense percent (variable costs / revenue) and
fixed expense percent (fixed costs / revenue)
Monthly tracking of costs that do and don't vary according to revenue allows you to monitor whether expenses are rising and may potentially lead to cash flow challenges.
Number of new patients / month – an active, healthy patient base requires a continuing inflow of new patients. If the number of new patients is flat or declining, this needs to be addressed or cash flow may be compromised.
It's essential to be prepared for unexpected situations such as an accident or illness. By establishing an emergency fund to cover operating expenses for three to six months, not only will you benefit from peace of mind, you could prevent a disaster for your practice. Consider setting aside funds in a savings account or maintain a working capital reserve.
When you effectively manage cash flow, you effectively manage both your business and personal financial security – and that’s something to smile about.
For positions involving the handling of your practice’s finances, consider performing a criminal background check, which will require the consent of the prospective employee. This will allow you to make more informed hiring decisions. Segregating employee duties is a powerful fraud deterrent. This involves separating responsibilities among different people for authorizing, receiving, recording, and reconciliation of transactions. This means no employee should handle more than one of these activities in vulnerable processes such as: purchasing, accounts payable, cash disbursements, customer payments, customer accounts, bank reconciliations, payroll, inventory, invoicing, accounts receivable, and financial statement preparation.
The following safeguards are also helpful in reducing opportunities for theft and embezzlement:
Combining preventive procedures with others that help to detect incidents of theft or fraud can also reduce the risk of these occurring in your practice.
Detective procedures include the following:
An ethics hotline is another valuable tool. According to the Association of Certified Fraud Examiners, fraud is most often discovered through tips and the best way to obtain these is via an anonymous ethics hotline. Some suppliers will provide this service at minimal or no cost to your business.
Fictitious invoices, phantom vendors, inflated billings, kickbacks, cheque forgery, and other payables and procurement schemes are common ways for employees to misappropriate funds. In order to discourage such incidents, familiarize yourself with your key suppliers.
Establish a list of approved vendors. Know what you are paying vendors for and whether they are providing you with the best value. This will help you identify any unusual trends, such as new vendors or unexpected price increases, when approving invoices and payments.
Theft of financial information and breaches of data integrity or system security could wreak havoc on your practice.
The following precautions can help to protect valuable data:
Since even the most vigilant controls cannot completely eliminate the possibility of fraud, having crime and employee dishonesty insurance in place can reduce the potential financial impact. Such policies can compensate you for losses and often, for the costs of investigating and quantifying those losses. Talk to your insurance broker or agent about appropriate coverage for your practice. Understanding the vulnerabilities in your practice will enable you to identify the most effective controls to prevent theft, fraud, or embezzlement. Your accountant or a fraud specialist can help you assess your internal controls and develop a plan to address areas of greatest risk. Sure, it could happen to you. But when you’re well prepared for the possibilities, you reduce the opportunities.
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