Dec
10
2008

Nineties rap group Wu-Tang Clan once proclaimed: “Cash Rules Everything Around Me.” Turns out they were right.

Just one year ago credit was king; today, small business and veterinary financial experts are all about cash—collecting it, using it and saving it wisely.

Cash flow is the lifeblood of any small business. Most small businesses rely on cash to pay for normal operating costs month-to-month. As business grows soft, and with banks promoting low- or no-interest home equity loans, it can be tempting to bolster your business with “mini loans” — cash advances, planned overdrafts, deferred credit card payments, infusions from personal savings, and so on.

Don’t do it.

An article in the Nov. 22 issue of The Economist magazine says that hoarding cash may be the thing to do right now. Debt was once seen as the sign of a healthy business, but that is not true in the current state of affairs. “More padding - in the form of cash in the bank – will be necessary to secure a clean bill of health,” the article says.

Others are saying the same thing. In a presentation to its portfolio companies that was cited in the article, Silicon Valley venture capital firm Sequoia advised small businesses to “become cash flow positive as soon as possible,” “spend every dollar as if it were your last,” and to “use a zero-based budgeting approach.”

Incoming AAHA President John Tait, DVM, MBA, said that relying on forms of credit, such as planned overdrafts, postponing credit card payments, and cash infusions from personal accounts is “not a sound strategy.” For veterinary practices suffering a cash-flow crunch, these actions probably won’t address the real problem, anyway, he said.

“Relying too heavily on incurring further credit and/or trade debt, which is often expensive over the short term, reduces your flexibility and perhaps your personal equity, threatens liquidity risk and perhaps marketability risk of a practice,” Tait said. “And it may not root out or correct expense management problems in the practice but just band-aid them.”

Tait said that aside from trade credit, practices should avoid assuming other types of credit when possible.

“Trade credit is often wise to use while receivables for work in progress are credited to the practice,” he said. “Additional credit should be assumed only where an absolute need exists, or where an immediate or timely cash flow return can be generated. An economic downturn is a period of time where capital investments need to be considered carefully.”

Use credit where it is due

Credit still has a role to play in sound practice management, however. The key is balance.

Dick Goebel, DVM, president of the practice development association VetPartners advised that it is not fiscally responsible to take too much cash out of the practice without specifying a certain amount for reserves or reinvestment.

“In addition to building cash reserves, I suggest that the business should be sufficiently viable financially to obtain a line of credit in advance of any unanticipated need, so that the business can be prepared for unexpected emergencies or strains on their budget,” Goebel said.

Goebel, who is also president of veterinary practice broker Simmons Great Lakes, emphasized that it is important to support the “core strengths” of the practice, even if exercising credit options becomes necessary.

“It is more important to borrow (preferably a business loan rather than a personal loan) than to make inappropriate cuts in operational expenses,” he said.” Two critical areas to maintain are adequate competent staff and ongoing practice promotion. … The only cuts made should be where waste can be identified and eliminated. Or, if there are non-core activities that are using resources and not providing a return, they should be candidates for elimination. Economic downturns do NOT signal a time for trying new things, offering new services, or expanding operations.”

The Economist echoed Goebel’s advice on making cuts during this recession: “As in every downturn, who succeeds and who fails is likely to be determined not only by what costs are cut, but how they are cut and above all which ones are not cut.”

Comments (1) -

DOROTHY
DOROTHYUnited States
3/20/2015 4:58:09 AM #

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