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Vet Partner Mark Harwood has written the following cashflow forecasting article that was featured in In Practice on 9 July 2020. The original article can be found here.

To ensure practices are set up to return to a ‘new normal’, thorough planning and forecasting are essential. Using short- and long-term forecasting helps to predict what impact the coming months may have on a practice’s finances. Likewise, taking action now and creating an action plan ensures that you are positioning your practice to be in good stead for whatever comes next.

‘SUCCESS is not final, failure is not fatal; it is the courage to continue that counts. We make a living by what we get, but we make a life by what we give’ (Sir Winston Churchill).

In planning this article, I decided that it needed an unusual but reflective start; one that makes us all stop, think and take stock, because we have been in, and are still in, very unusual and challenging times. In Sir Winston Churchill’s famous quote, he encapsulates the spirit that we have recently seen in the veterinary profession – a coming together with strong courage, a common goal to look after animals and their owners and a true ‘can do’ attitude.

Practice owners and their teams have overcome many challenging restrictions brought about by the pandemic, and the resolve of the veterinary community has been extremely impressive.

As further challenges lie ahead following the lifting of some restrictions, these challenges bring opportunities that practices will be able to take advantage of, and reap the benefits from, in the coming months and years.

What has happened so far?

So, what should we be doing now? Planning, and more planning. Before we look at how best to plan ahead, let us take stock of where we are at the moment – there have been a raft of support measures available for practices to use, including the government’s furlough scheme, grants, rates relief, loans and more, that have all been well documented already.

Some practices saw their turnover drop to as low as 15 per cent of their normal levels in the first few weeks of lockdown. But whether this turnover was 15 per cent, or more than 50 per cent of ‘normal’ levels, the impact has undoubtedly been severe on everyone. Some practices even took the decision to close their branches (be that temporarily, or potentially permanently).

Farm animal practices have generally faired most favourably, given their link to food production and key worker status, and thankfully small animal and equine practices are now seeing a resurgence following a backlog of client demand.

Now the question is how to best cater for that demand and balance staffing levels, with a backdrop of uncertainty regarding what the practice’s finances may look like over the coming months, and even years. There is much talk about a veterinary economy with 90 to 95 per cent of ‘normal’ turnover in the medium-term, one to three years ahead; however, we should not be aspiring to operate at that level. Instead, we should aspire to provide the best possible service that our practice can. Looking after our teams will help us look after our clients, and the finances will then flow from there, not the other way around.

In mid June 2020, turnover for small animal and equine practices is trending at 75 per cent to more than 80 per cent of pre-COVID-19 levels, with farm practices seeing turnover around normal levels (of course with exceptions). Nevertheless, we all need to have a handle on what our practice finances may look like over the coming months and years. We should, and we must, plan our practice and personal finances, and forecasting is the means to do so.

Forecasting

During the pandemic, many practices have been preparing weekly cash flow forecasts covering a period of a few months. This has proved really helpful, particularly to alleviate uncertainty about what the impact might be of making certain decisions; for example, using the furlough scheme versus continuing regular working staff levels.

What is really crucial now is long-term forecasting. That is not to say short-term forecasting is not beneficial, but to make the best decisions for the longer term, we need to have a strong focus on what the financial performance and position of the practice may look like, and this needs to dovetail with the owners’ personal financial forecasts.

Dedicated financial forecasting software is available that integrates the profit and loss account, with the balance sheet and cash flow on a monthly basis and grouping that into a year(s).

A more simplistic, but still very beneficial approach, is to take last year’s profit and loss account as a starting point, and then make some assumptions about what the year ahead may look like and subsequently convert that profit and loss account into cash. To recap, a profit and loss account looks at income less most costs on an invoice basis, whereas a cash flow only includes cash, not invoiced figures. Table 1 models this approach.

The figures in Table 1 are purely illustrative, and of course there will need to be more detailed workings to derive the projected figures in each of the categories. If you are unsure, it pays to take advice to ensure that all cost streams are appropriately considered; for example, employer’s national insurance, pensions and tax.

Every practice should consider their financial position, and every action plan coming out of the projection should be bespoke – there should not be a ‘one size fits all’ approach. Having prepared its projection (Table 1), our example practice should think about the following:

• Cash is looking tight by the end of the year – up front discussions with the bank will be important to ensure support is put in place early on, be that an overdraft facility or something else;
• Could there be cash ‘pinch points’ in the year where cash is actually worse than the position at the end of the year? – delving into the detail on a monthly basis would therefore be helpful;
• Staffing costs are slightly reduced – although turnover is projected to be down, given that providing a service is often taking longer than normal at the moment, will that level of turnover be achievable with the projected level of staffing resource? Additionally, for practices that have been receiving cash from health plans, but the services under these plans have been put on hold due to Covid-19, it is important to consider that you may see a spike in clients wanting these services once they are able to be resumed. Therefore, if you need to take advantage of the more flexible furlough scheme that came into effect on 1 July 2020, which allows part-time furloughing, it is worthwhile thinking about that now. It might be that you need all of your team back soon (or perhaps already have them back), but what you need during a spike in demand could well be different to what staffing cover you might need in a few months’ time. The projection therefore needs to be kept under review – this is where building up a monthly projection which will help you to build a picture of the annual figures will be really useful;
• Will the projected reduced drawings of the owners dovetail with their own personal positions?;
• Is the practice getting the best value on all of its services? (note that this doesn’t necessarily mean the cheapest);
• Taking all of the above into account and assuming that this practice is not sitting on significant existing bank/cash reserves, it would certainly seem sensible to ‘sensitise’ the projection – that is, run a number of other scenarios with different turnover and cost levels to assess what the impact of different income levels and making certain decisions would be;
• Note that the projection is only telling us about figures – you will also need to consider people’s wellbeing and the impacts that decisions made will have.

Doing this projections exercise provides a reference point. Of course, what actually happens in reality will be different to some degree, but the actual figures can be compared to the projection and subsequently the projections can be revised over time as necessary.

What it does do is help to provide a degree of comfort when making decisions about how best to run the practice as we move out of the pandemic, as the impact on practice finances will be better understood.

Projecting is important, but so is taking action and staying one step ahead, while also ensuring that we continue to provide the best service we can to our clients and simultaneously keep our teams safe

Table 2 provides a ‘coming out of Covid-19’ checklist. This is by no means exhaustive, but hopefully gives readers food for thought. Success is clearly not just a tick box exercise, but being proactive and looking at your strategy for the year and years ahead now, while also accepting that it will no doubt evolve, will stand you in good stead.

The checklist points should of course take into account any government and veterinary body guidelines that may be in place at any particular time (such as social distancing measures).

Summary

Practices have come a long way since lockdown began on 23 March 2020. As life gradually goes back to a ‘new normal’, forecasting and putting together your practice’s own bespoke action plan will help to position your practice strongly to support your team and your clients in the next phase and beyond.