Budgeting during a pandemic: Advice and a break-even calculator
During the COVID-19 crisis, all practices are entering an uncertain economy, either with reduced business from a client base that is sheltering at home, with the reduction of staff members to illness, or from being classified as a nonessential business that must close to prevent community spread of the virus.
Budgeting under these new uncertain and ever-changing conditions is a huge challenge facing veterinary practices. To help, NEWStat reached out to Jennifer Braid, CPA, EA, and Marsha L Heinke, DVM, EA, CPA, CVPM, of Veterinary Practice Made Perfect, a consulting practice for the veterinary industry. Braid is lead accountant and senior data analyst for the firm, and Heinke is founder and author of Practice Made Perfect. Both offer expert advice for those seeking to plan ahead and manage cash flow during a pandemic.
While the COVID-19 crisis develops, practice owners and managers should do their best to prepare their practices for the new financial reality by “revisiting daily break-even computations so that they can strategically and smartly plan how to allocate resources and potentially borrow money going forward,” says Braid.
She explains, “Running your current numbers and solidifying daily cash needs is an important first step to understanding how your practice is faring and what steps you need to take next to keep your practice alive and healthy.”
To that end, she has shared a break-even calculation workbook with variables that take COVID-19 into consideration. This breakeven calculator can help practices of any size calculate and understand what their cost per day is under the current COVID-19 circumstances, even with a reduced work force, lower client revenues, and fewer open days. Braid clarifies that “this model does not include calculations for building in potential profit or long-term financial planning.” Also, there may be costs your practice incurs that have not been specifically listed in the calculator. Braid advises, “this is a great time to go through all practice expenses, determine what is absolutely necessary, what is wanted but not critical, and what can be immediately eliminated.” For example, Braid and Heinke recommend reviewing your practice’s continuing education budgets, uniform budgets, service contracts, equipment leases, and fund allocated for events and promotion. As you go through the calculator, try to decide what can be scaled back or eliminated to help free up cash flow.
Step one: Determine the number of days the practice will be open for the year, as if the current COVID-19 working conditions were to continue.
Look back at how many days your practice has been open since COVID-19 began impacting your area and assume that this schedule will continue for a consecutive 12-month period. This calculation can be done on sheet #1.
Step two: Calculate the practice’s relatively fixed costs.
Add in your current fixed costs in sheet #2 of the calculator, such as loans, equipment leases, premiums, and payroll (or pull these numbers from your existing profit and loss report). As you work with this model, ascertain whether your practice activity has diminished to a level that some costs (such as payroll) can be budgeted to lower amounts. Payroll is often considered a variable cost, but in this situation Heinke and Braid recommend looking at a fixed, minimal level of staffing during the crisis period. You may wish to work a second budget of hours and rates of pay per employee to determine the values to input. Input the total into sheet #1.
Step three: Calculate the practice’s variable costs percentage.
Calculate your variable costs in sheet #3. These are expenses that are directly proportionate with the volume of veterinary services and sales. For all the costs, reference the practice profit and loss report for a full year of activity and input the typically experienced percentages of gross operating income. Move the final percentage to sheet #1.
Step four: Calculate the practice’s annual break-even figure, without profit and assuming no income tax using the calculator formula.
The calculator is just meant to show the minimum cash flow needed for your practice to keep its doors open, without any extras.
Step five: Divide to calculate the revenue needed per day to reach the break-even figure using the calculator formula.
Compare this figure to what you are currently bringing in per day to determine whether you are breaking even or are in a deficit. If the practice is in a deficit, reach out to see if you can take advantage of outside funds, such as through an existing lender or through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Braid and Heinke also recommend continuing to revisit this calculation as things change. If your practice ramps up telemedicine, for example, run your calculation again with the new services as a factor.
Readers interested in more information can view this complimentary webinar on how to use the form.
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