30 Apr 2021
It is always vital to prepare and track realistic cash flow forecasts – especially in the current climate. Concrete cash protection procedures are also key for your practice to thrive, rather than just survive…
Nick Heaney
Job Title
Image © Bryony / Adobe Stock
The year 2020 was certainly one many businesses, including veterinary practices, will hope to put behind them.
Even before the global pandemic hit our shores, vets were having an increasingly tough time, with sources suggesting more than half of practices in the UK were reporting below average profits – and quite a significant number reporting negative results.
It has always been vital that vets focus on their businesses and implement efficient working practices to ensure their clinics are sustainable and, therefore, able to continue to provide excellent care for the animals of the UK.
With the arrival of COVID-19, it has become increasingly important for the owners of practices to focus on their business rather than solely concentrating on the work at hand.
During the initial COVID-19 lockdown phase, the various support packages, from the furlough scheme to tax deferrals, helped keep many businesses afloat with the hope of the nation that, if we all did as we were told, we could go back to “business as normal” as soon as possible.
We have all heard the phrase “cash is king”, and approximately 80% of failed businesses – across a variety of sectors, including veterinary practices – collapse due to fundamental cash flow issues. Under the cloud of the global pandemic and the current economic uncertainty we find ourselves in, the management of cash within a practice is important – now more than ever.
There is an old cliché: “What gets measured gets done.” Now we might not be too sure as to the origin of this statement or the wording, but the message is clear.
Measuring something will give you the information you need to achieve your desired goals. With that in mind, it is imperative for all practices to create and formulate cash flow forecasts for the practice to measure, estimate and track the incoming and outgoing cash resources for a period of time in the future.
It is important to recognise that a practice’s profits – at the end of a month, quarter or annual period – do not directly result in increased cash surpluses for the business.
Many of the previously quoted failed businesses were profitable, but ultimately failed due to lack of cash resources. Forecasts are essential to try to predict what may happen to cash in the future and enable owners of practices to take decisions now to protect the business for years to come.
Forecasts are part art and part science, but a good, realistic cash flow forecast will enable practice owners to make informed business decisions.
It is all well and good pulling together detailed cash flow forecasts for a business, but many people then put them to one side thinking that’s the job done.
Wrong. Cash flow forecasts need to be tracked against the actual results, which will help the owners of practices gain a better understanding of why the estimated cash flows are not being met. These forecasts also need to be measured and linked to the profit and loss account and balance sheet of the practice. This will ensure the owners have a holistic view of the practice’s finances, from the size and timing of future tax liabilities to such items as the level of stock held on site at any one time.
During the preparation of the cash flow forecasts, and the subsequent tracking of actual income and expenditure, veterinary practice owners can take the opportunity to review the practice’s variable overheads. Through these reviews the owners can take a pragmatic approach to aim to reduce the high variable overheads as much as possible.
Options such as buying better-quality supplies may lead to overall savings, as the practice will not need to replace these consumable supplies as much as was previously done.
Additionally, including the whole practice team in the discussions around cost-saving measures will ensure the whole team buys into the new policies. Also, by liaising with the whole team, excellent cost-saving ideas may come to light that the owners have not considered.
When it comes to cost-saving reviews, the reviews around stock holding levels and controls are extremely important for practices as they try to balance the need to reduce the levels of stock, and thereby free up cash resources and the need to ensure stock quantities held are sufficient to ensure top-class animal care can be given when the need arises. A close look at the stock levels may identify non-essential items that can be reduced and improve the cash position of the practice.
Many practices may be highly geared, with some expensive debt to banks and other finance providers. It is important to enter into discussions with these lenders as soon as possible to discuss options around possible payment and interest rate holidays.
Some hold the opinion that delaying payments to suppliers will help with the cash surplus of a practice, but this needs to be done with extreme care.
Estimating, tracking and controlling the outgoing cash resources is key, but equally important is the need to review debt and credit control. The pandemic undoubtedly has had an impact on most UK households, with the Bank of England stating that 28% of them have seen their income reduced. Most importantly, though, 57% of households have reduced their spending.
This increase in the unwillingness to spend money, combined with the negative impact the pandemic has had on animals – from an increase in anxiety, when not having their own time, to increase in lameness with dogs being walked and exercised much more – may result in owners needing the services of a vet more often, but looking to delay or defer any payments.
Having clear credit control policies and timely account balance follow-up procedures in place is key. Do not be surprised that if you do not place the utmost importance on collection of overdue accounts, customers will consider that it is not important to make payments on time.
During times of economic stress, many practice owners may ignore or forget about the ongoing compliance requirements of submitting the practice’s accounts and tax returns.
Getting the business’ financials up to date is key. Many businesses may hide away from this compliance, but knowing what tax liabilities will arise in the future will undoubtedly assist with cash flow management.
Additionally, aiming to prepare and submit the financial statements and tax returns early will give your accountant time to undertake full and detailed reviews, thereby ensuring tax deductions are maximised and tax liabilities are reduced.
Completing accounts early may also enable you to be able to implement changes, such as a switch in accounting period, which may be beneficial in reducing the upcoming tax liabilities.
Should the resultant tax liabilities – both personal and corporate – not be afforded, I would strongly urge businesses and individuals to contact HMRC as soon as possible to identify and agree possible payment plans. Your accountant can speak to HMRC on your behalf if he or she is registered as your agent, but HMRC will want to speak to the taxpayer when it comes to agreeing a time-to-pay arrangement.
During the past year, the Government-backed support has changed and evolved, and businesses should review online resources and speak to their professional advisors to ensure all Government-backed support has been taken.
It is also worth noting that the Government’s support, whether in the form of grants or furlough receipts, is taxable in the hand of the recipient, and care needs to be taken as to when the liability arises. Corporate accounts and accounts prepared on the accruals basis could see the tax liability becoming payable a whole 12 months before many people consider it due.
Practices that prepare and track realistic cash flow forecasts together with putting some concrete cash protection procedures in place will have confidence that they will survive.
