Help! We Can’t Make Payroll!
If employee paychecks are at risk, do whatever you can to find the money immediately. Then, solve the central issues.
Over the past year, much of the talk around veterinary practices focused on how well they did — record growth and more clients than they could handle. Some clinics, though, suffered greatly. They closed temporarily or cut hours because employees were out with the coronavirus. A few were heavily in debt. One problem that struggling practices often share is the challenge of making payroll. So, what do you do if you’re suddenly unable to compensate your loyal, dedicated employees?
The first step is to find the money quickly and keep your business going. The second is to identify the cause of the shortfall and the changes needed to keep the cash flow strong. The last is to start a cash-flow monitoring system.
Keeping employees informed and prepared is critical. Notify them as soon as you know their paychecks will be reduced or delayed. Tell your team what you are doing to obtain the cash and solve the underlying problems. If layoffs are imminent, warn everyone.
Let’s explore the three steps in detail.
1. Get Your Employees Paid
You have legal, ethical and practical reasons to find the cash to pay your employees on time. Legally, the Fair Labor Standards Act and state and local laws require that workers be paid promptly. Failure to do so can subject a business to back wages, back taxes, penalties, attorney fees and court costs.
From a practical standpoint, a clinic trying to recover from financial trouble needs employees. Team members won’t stick around long if they aren’t getting paid and if finding another job is easy. Veterinary medicine is a small community, so word spreads fast about practices that can’t pay their bills.
As far as getting the cash to cover your payroll, consider these options:
- Reduce owner compensation and use the money to pay employees.
- Reduce or delay bill payments. Making the minimum credit card payment isn’t ideal but can help in the short term.
- Increase collection efforts if your accounts receivables are substantial.
- Borrow from a financial institution.
- Arrange a loan from the practice owner.
- Obtain a line of credit.
- Ask friends or family members for a loan. Be prepared to explain why the practice is in a precarious position, how you will repay the money and how you will prevent a recurrence.
- Obtain a credit card cash advance.
You might choose more than one option. Be aware of the challenges, too. For example, the practice owner might not have readily available cash to inject into the business, lenders might reject your application, and credit card interest rates are high. Still, the objective is to pay your employees and buy time to correct the fundamental issues.
2. Fix the Problem
Once the immediate crisis is over, focus on understanding why the shortfall occurred. Reduced or negative cash flow happens either because the inflow (revenue) declined or the outflow (expenses, debt payments and owner distributions) increased. Sometimes, it’s a combination.
If revenue declined, ask why. For instance:
- Are you seeing fewer clients? Why? Did demand fall, or were hours slashed and appointments reduced?
- Are clients spending less at each visit? Again, why? Is your practice so busy that you don’t adequately communicate the need for health care? Has client service slipped?
If expenses have increased, which categories and why? Don’t forget to review all your smaller costs as well.
Identifying the why isn’t enough. You also must reduce the likelihood of another cash crunch. I recommend:
- Postponing major expenditures such as a remodeling and large equipment purchase.
- Talking to your landlord about deferring rent payments.
- Negotiating deferred loan payments.
- Being mindful of when you must repay deferred money. For example, will the payments rise after three months?
In addition to increasing revenue and tightening your spending, every practice should possess an emergency fund. Maintaining separate bank accounts will reduce the temptation to draw on the emergency cash. How much money should be set aside? The standard recommendation is three to six months’ worth of fixed expenses. The range depends on the practice owner’s risk tolerance, local and national business and economic trends, the expected drop in practice revenue, the debt and the ability to cut expenses when needed.
The reserve can come from a combination of bank savings and a line of credit or a similar instrument. Relying solely on a credit line is risky because the lending terms might change when you need the money the most.
3. Monitor Your Cash Flow
A profit and loss statement doesn’t include everything needed to analyze cash flow. A P&L excludes cash inflows and outflows such as loan proceeds, the principal portions of loan payments, owner dividend payments and the cash purchase of equipment. A P&L includes several non-cash items, such as amortization and depreciation, that should not be part of the cash-flow calculation. A high net or taxable income isn’t the same as a high level of cash flow.
The management team needs to understand where the cash comes from, where it goes and the cash position in three to six months. Given this kind of analysis, a veterinary practice should have advanced knowledge of a payroll crisis.
The most important report for effectively managing cash flow is a monthly statement showing cash inflows and outflows and the net change in cash over the period. A cash-flow budget and regular comparisons between actual and budgeted flow are other useful forecast documents.
Each veterinary practice hits hard times when the cash flow is tight. The trick for you is to prepare so that the impact is survivable.
Dr. Karen E. Felsted is the founder of PantheraT Veterinary Management Consulting. She spent three years as CEO of the National Commission on Veterinary Economic Issues.
LEARN AND EARN
Dr. Karen E. Felsted teaches VetFolio subscribers how to set fees to maximize profits and retain clients. The online course awards 1.5 CE credit hours. For more information, visit bit.ly/38Kv7te.