PRACTICE MANAGEMENT
3. Creditors Payment Period
From the Balance Sheet:
R’000
Current Assets
Stock (Inventory)
80
Debtors (Accounts Receivable)
50
Creditors
Cost of Sales
20
120
Current Liabilities
Creditors (Accounts Payable)
20
The profitability of the business seems pretty good
and the current assets are significantly more than the
current liabilities.
But before the working capital can be analysed meaningfully, three important key performance indicators
(KPI’s) need to be calculated:
1. Stock Days
Stock
Cost of Sales
80
120
x
365
x
365
=
243.33 days
In other words, once an item comes into the practice,
it will take an average of 243 days before it can be
charged for (surgical needles, gloves, etc) or sold (pet
food, etc) and cost recouped.
Analysis:
Naturally one wants the stock days to be as close to
zero as possible – not only does a veterinary practice
need the money to pay to the owner, but expenses
and creditors will need to be paid. If it takes 243 days
to get money, it means that the practice will only get
money after 8 months!
2. Debtors Collection Period
Debtors
Sales
50
200
x
365
x
365
=
91.25 days
In other words, once a service has been rendered or a
product sold, it takes an average of 91.25 days to collect the money. This doesn’t exclude payments made
immediately – it is an average of all sales.
Analysis:
Again, it is pretty obvious that the practice wants the
money to come in as quickly as possible. If it takes 91
days, it means that the practice would not be able to
pay, for example, salaries, for 3 months.
x
365
x
365
=
60.83 days
In other words, it takes an average of 60.83 days to
pay all suppliers.
Analysis:
I argue a lot with clients about this. In South Africa we
have been raised to pay off debt as quickly as possible. And while this is a good strategy in one’s personal
life, it is the opposite in a veterinary practice. The reasons for this will become clearer when we look at the
Working Capital Cycle.
The Working Capital Cycle
The Working Capital Cycle measures the relationship
between trading cash inflows and trading cash outflows.
The KPI’s from the previous section create the Working
Capital Cycle:
Days
STOCK DAYS
243
DEBTORS COLLECTION PERIOD
+ 91
TOTAL
334
CREDITORS PAYMENT PERIOD
- 60
274 days
shortfall
What this shows, is that it will take an average of
243 days to sell an item or use a product in the
rendering of a service.
It will take an average of a further 91 days to collect the money from the client, meaning that from
when the practice has bought the stock, it will take
a total of 334 days until money is collected.
However, the creditors only need to be paid after
an average of 60 days. This means that the practice will have to find money 274 days before they
receive it, in order to pay their creditors.
So how can this situation be improved?
There are 3 approaches:
1. Reduce stock levels
Compare the stock days at the various stock levels
below:
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