Vet360 Vet360 Vol 05 Issue 05 | Page 24

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