Leslie A. Mamalis
MBA, MSIT, CVA (Emeritus)
Leslie A. Mamalis is the senior consultant at Summit Veterinary Advisors and the firm’s former owner. She provides practice valuations, profitability assessments, feasibility analyses, and financial consulting to veterinary specialists and general practices. She is co-chair of the VetPartners Valuation Council. Learn more at summitveterinaryadvisors.comRead Articles Written by Leslie A. Mamalis
Financially healthy veterinary practices have cash available when needed to pay everyday business expenses and jump on emerging opportunities. But notice I said “available” cash, not on-hand cash. What’s the difference? While all hospitals keep one or more bank accounts, they ideally have alternatives. In other words, the practice owners and managers put financial vehicles in place to keep the cash flowing in good times and bad.
Build a Reserve
How much of a cash cushion should a veterinary hospital have readily accessible? Experts I queried recommend one to six months’ worth of cash outlays covering everything from payroll and rent to insurance premiums and loan payments. Why the wide range? In one word: personality. We all know people who spend money as fast as they accumulate it, while others always save for a rainy day. The faster money runs through your hands, the bigger the reserve you need.
Keep enough money readily accessible so that if disaster strikes and your practice can’t see another appointment for a month, you can keep the proverbial lights on and pay your employees. A month provides plenty of time to identify how to see patients, whether it means hiring relief doctors or moving to another location.
Cash reserves are significant in single-doctor practices. If the veterinarian falls ill, is injured or wants an extended vacation, a cash reserve can sustain the hospital until the doctor returns. (Other methods of addressing illness and injury, such as disability insurance and overhead insurance, are outside the scope of this article.)
Additionally, don’t park your cash reserve in a checking account. We have become so accustomed to earning little or no interest on savings accounts that many don’t shop for alternatives. Today, many banks offer savings and money market accounts at interest rates of 4% to 5%. Certificates of deposit might generate even more income. The caution with CDs is if you need to withdraw some or all of the money before the maturity date, you could lose some of the accumulated interest.
Regardless, put your money to work for you. Don’t let it sit idle.
Lines of Credit
As many general practices can attest, seasonal downturns often lead to cash-flow issues. For example, if the slow time of year arrives and you’re hit with an unexpected expense, paying vendors and covering payroll can be challenging, let alone investing in your hospital.
When you own a small business, having access to money when needed is critical. When you don’t want or need a large loan and the long-term commitments that come with it, consider a line of credit (LOC).
A business LOC improves cash flow by giving you a pool of funds to pull from in certain situations. Like a credit card, a business LOC allows you to borrow up to a set limit. You pay interest only on the amount you use, and you can pay it off in full every month, make only minimum payments or do something in between. As you repay the borrowed money, you can draw on the LOC again, up to your credit limit, without having to reapply or seek approval.
A business line of credit also can act as an emergency fund, even if you don’t have the immediate need. Then, in a critical moment, you can quickly access the LOC.
Here are some points to keep in mind about LOCs:
- While they usually have lower interest rates than a credit card, a LOC doesn’t award points for travel or cash back.
- LOCs might come with fees: initiation, withdrawal, maintenance and inactivity. Research banks to find an LOC that fits your needs.
Also called working capital loans, operating loans are often seen with startups and newly acquired veterinary hospitals. A lender provides the money for an initial purchase of inventory or to cover payroll while the practice grows. Since cash is the lifeblood of any business, an operating loan gives the practice owner ready cash to pay bills beginning on Day 1. A word of caution, however: Operating loans are meant to pay business expenses, not personal expenses.
Some lenders will establish a LOC for a practice buyer instead of lending working capital. For example, the bank will set up a $75,000 LOC rather than raise the acquisition loan by $75,000. Doing so allows the buyer to use money when needed and pay interest only on the spent amount, not the entire $75,000.
While an operating loan is intended for everyday expenses, a business loan is for specific purposes, such as acquiring big-ticket medical equipment, remodeling or expanding a hospital, and even buying a practice. Business loans typically have fixed payment terms, while business LOC payments are more flexible.
In the end, be proactive. Talk with your banker, financial adviser or tax accountant about building a cash reserve and utilizing other tools to create an emergency fund. Having the money to see your hospital through a temporary downturn or take advantage of an incredible opportunity to improve patient care or staff morale can be a difference maker.
Unfortunately, the worst time to apply for a loan or LOC might be when you need the money. Prepare for unforeseen expenses by making sure alternatives are available.
GIVE IT A TRY
Is setting aside enough money to cover one month’s expenses so difficult that you won’t even try? Then why not start with small steps? Could you save $100 a week? Developing such a habit is more important than the amount you accumulate.