The current economy has affected veterinary practices in many ways. Practice owners can use a multitude of tools to manage through these challenging economic times. Practices have experienced record drops in revenue, a decrease in the number of patient visits per year, lower average transaction cost, greater marketing expense and an overall greater demand on time to just maintain the same level of revenue as two years ago. This has forced many practice owners and managers to find ways to improve cash flow to cover the practice’s expenses. Several steps can help to alleviate the cash flow crunch. The supplies and drug inventory should be closely inspected and analyzed to get cost of sales in line with industry standards. Aggressive marketing campaigns can generate new business and retain current customers. When these basics don’t pan out, an owner might consider reducing staff hours to ensure that the lay staff salaries are appropriate for the amount of revenue being generated. The next step might include reducing associate DVM hours and having the owner cover additional hours. The true challenge as a manager or owner comes when these methods still do not provide the cash flow flexibility that a practice needs to maintain during the tight times. One tool that is easily overlooked is a review of the debt structure of the practice’s current obligations and real estate holding company to see if refinancing may yield savings. This review has the potential to help a practice create additional cash flow to re-invest in marketing or to help manage in these difficult times. Debt Review The first step is to compile a schedule of all of debts. In that schedule, include the original loan amount, the current obligation, the interest rate, monthly payment and term of the loan. This concise and well-outlined list will allow you to get the true picture of monthly cash leaving the practice to cover debt. Interest Rates Next, review this debt schedule to identify any debts at interest rates higher than today’s available rates. Normal interest rates are currently between 5 and 7.5 percent. The debt schedule allows you to easily see the range of rates you are paying and the monthly obligation of each note. If the debts were originated at a higher rate, consult with a lending professional who can quickly find an additional $5,000, $10,000 or more to add to your bottom line over the course of a year. If you have a $500,000 obligation that has a current interest rate of 8.5 percent and you can refinance this into a 5.5 percent rate, you would save $15,000 per year or $1,250 per month. A second key piece of your debt review will include looking at the term of loans on all existing debts. In general, you can finance practice assets over a term of 10 years; real estate is financed over up to 25 years; and individual equipment pieces are generally shorter at five years but as a package can be on a term up to 10 years. A wide range of terms is available for the debt. Lenders have different approaches but in tight cash-flow times, maximizing the term of your debt can help provide you with a more manageable monthly obligation. This is best demonstrated through an example. If you have several different leases that total $150,000 at an interest rate of 5 percent with each of them on a five-year term, you have an annual payment of $33,968.22. If you are able to roll these loans into a loan with other associated practice debt and place it on a 10-year term, the resulting payment of $19,091.70 will reduce the annual obligation by $14,877 per year. Revolving Debts The final step is to review trade accounts, credit cards and other revolving debts associated with the practice and closely monitor these obligations. In many instances, as cash flow gets tighter, we start to rely on trade and revolving debt to carry the practice, convincing ourselves that we will get this paid in full the next month. If you are in a position where you have accumulated a high level of revolving credit that isn’t being paid off in your busy season, take immediate steps to stop this cycle. Stop purchasing supplies on credit and complete an exhaustive review of expenses. This detailed review will allow you to make appropriate adjustments. If these adjustments are not easily identified, it might be wise for you to seek a financial checkup on your practice. Once you have tightened the spending or increased revenue to where you don’t need revolving debt, then you can term the existing balance out through a five- to 10-year term loan. This will allow you to have a reasonable payment and a plan to reduce principal. You get in trouble if you have not fixed your cash-flow problem and continue to borrow on your existing lines of credit. These guidelines are just a starting point to use as you assess your clinic’s obligations and payments. Interest rates and the type of credit you are carrying can help reduce the monthly cash demands of your debt. In an economy where every dollar matters, this can be one tool that business owners can utilize to maximize their cash flow. Travis York is a senior loan officer at Live Oak Bank. This Education Series story was underwritten by Live Oak Bank of Atlanta. <Home>
