BUSINESS
BUSINESS
Consider the table:
Project A (R) Project B (R) Project C (R)
Initial Investment
Increase in sales
Decrease in costs -700 000
350 000
600 000
250 000 -100 000
350 000
0
250 000 -80 000
180 000
150 000
250 000
Increase in expenses
Insurance
Maintenance
Salaries -354 000
-120 000
-234 000
0 -390 000
-120 000
-70 000
-200 000 -190 000
-25 000
-90 000
-75 000
200 000 150 000 25 000
-105 000 -105 000 -54 000
-9 000 -95 000 31 000
Scrap value
Tax
Cash Inflows / Outflows
Any of the three questions that could be asked
by a Vet can now be answered:
a. Will the item(s) make money? Project C will
result in a net cash inflow.
b. Should I choose between 2 or 3 or more
alternatives?
Project C is the only project to show a net
cash inflow. (Bear in mind that while Projects
A and B both generate negative cash flows,
Project B is ranked below Project A).
c. Should I choose between several types of
projects? The table does not indicate what
the different projects are, but it is clear that
Project C remains the most viable regardless.
The table shows the Net Cash Flows for each
project – however, it is also vital to know when the
cash flows occur.
4. Timing of the Cash Flows
However, there is a very important component missing – while the table shows the net cash flows, it is vital to know
when the cash flows occur across the life of the Capex item. The table below shows the annual net cash flows for
Projects A, B and C:
Project A (R) Project B (R) Project C (R)
Initial Investment -700 000 -100 000 -80 000
Net Cash Flow for Year 1 246 000 -65 000 21 000
Net Cash Flow for Year 2 155000 -50 000 19 000
Net Cash Flow for Year 3 50 000 -30 000 17 000
Net Cash Flow for Year 4 40 000 150 000 15 000
Net Cash Flow for Year 5 40 000 n/a 14 000
Net Cash Flow for Year 6 20 000 n/a 25 000
Net Cash Flow for Year 7 140 000 n/a n/a
Total Cash Flows -9 000 -95 000 31 000
Note:
a. Each project has a different lifespan. Project
C might be a new practice management
system that will have benefits for 6 years, as
opposed to Project B which might be a new
computer system that has a shorter life span.
b. The last year of net cash flows for each
project reflects a higher amount – this is
because many capital items can be sold at
the end of their useful lifespan. This could be
scrapping old office furniture or selling a used
vehicle.
c. The net cash flows do not necessarily reflect
the actual life span – one practice may plan
on using an item of machinery for 3 years,
while another plans to use the same item
FINANCE FOR VETS | A guide to financial management of veterinary
businesses in South Africa
Andrew consults extensively to vet practices and other stakeholders within the industry, as well as
conducting lectures on various aspects of business at Onderstepoort. His expertise has made him a
sought-after speaker on various aspects of the business component of the profession
He has drawn on his wide experience to write the definitive guide to the business management of
veterinary businesses in South Africa. Titled ‘Finance for Vets, it includes all relevant aspects of the
financial management of practices and other veterinary businesses, covering the management of business
performance, optimising cash flow, budgeting, valuing a practice, setting KPI’s and much more.
The book is essential for all vets - whether they own a business or not – and practice managers, as well as
anyone involved in any aspect of the business of a vet practice.
Release Date: February 2019
Price: R375.00
Special pre-order price: R325
Email [email protected] for more information.
vet360
Issue 05 | NOVEMBER 2018 | 24