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Case Study: I can't afford to pay my bills, what am I doing wrong?

We recently had a companion animal practice owner from the USA ask why “my practice is so busy, sales have increased, but I don’t have any money left over and I can barely afford to pay my bills. What am I doing wrong?”. Unfortunately, this is a common problem.

Getting to a business diagnosis is very similar to doing an exam on a patient. First of all, we started with several questions to help us unearth anything that might not be obvious. We found out that this practice had recently expanded and had invested in a new veterinarian and upgraded their x-ray system. We then reviewed their financial statements, our version of running a CBC/Biochem to identify the underlying pathology. They had impressive sales and profitability, so where was the money that should be in their bank account?

After reviewing some financial ratios, we discovered 2 key problems. The first was that they offered credit to their clients. Rather than take payment at the time of service, they allowed their clients to pay within 30 days. This system was leftover from the previous owner, and no one thought to change it. What we found was that their average days' Accounts Receivables, a measure of how long it takes on average to collect money from customers was close to 70 days, nowhere near 30 days. Imagine the shortfall in your bank account if you had to pay your suppliers and other vendors in 30 days while waiting another 40 days on average to collect money owed to you. You would never catch up.

The second thing we found was that the monthly amount they owed for new equipment was eating into their profits. Capital expenses are a category of expenses for things we lease or buy for a large amount. You may have $20,000 in profit on your profit and loss statement but if you have to pay $5000 in lease or loans you really have $15,000 leftover. If you are waiting 70 days to get paid, there isn’t much left to pay for many expenses.

We had an answer. This practice had $70,000 owing from clients, $40,000 of which was older than 30 days. That 40k would do a lot better in the practice owners bank account so they could pay their bills and loans while having money left over for other investments or as their reward as a practice owner.

We recommended that they immediately institute a payment at the time of service policy. Some long-time clients have paid within 30 days, so we left them alone. Why penalize them for paying their bills on time. Any poor payers and all new clients were immediately categorized as payment at the time of service.

A recent follow-up call a couple of weeks later found that nobody had complained about the new terms of service and there was more money in the bank than a couple of weeks before.

All in all, a great outcome. We were so happy to help.

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