What is in this article?:
- BEEF Vet: How To Choose The Best Lender For Your Practice
- Newly Minted DVMs
- Starting Up
- Expanding Carefully
Smart financial decisions aren’t always about the lowest interest rate. Veterinarians should factor in relationships, community support and an understanding of agriculture.
Most business owners start their own operation because of a specific skill or knowledge base in that area—not necessarily because they have general business skills or superb financial management, says Dennis Fike, Senior Vice President of Risk Management at Frontier Farm Credit in Manhattan, KS.
For agribusiness, one of the key concerns for a new practice should be managing the ups and downs of agricultural business. The cyclical nature of the industry must be addressed financially to be successful over the long term.
“Owners really need to manage liquidity,” Fike says. “It’s the most common piece of advice we give. A lot of times, they try to carry too much debt and don’t provide cushion for those times when there is a lower demand for services. You need to have cushion in the balance sheet to have cash on hand.”
Frontier Farm Credit recommends about three months minimum of cash on hand as a cushion for volatile times, or a current assets-to-liabilities ratio of 1.5 to 1 or better.
“Hand-in-hand with liquidity is making sure debt is properly structured,” he says. “When you’re buying vehicles or equipment, make sure it’s on a five- to seven-year term not a three-year term. Even when you anticipate strong cash flow, it’s important not to stretch yourself too thin.”
In addition, Fike recommends doing a cash flow projection at least annually and monitoring it throughout the year. It’s one of the ways business owners can be more aware of excess cash from month to month, which will help determine what type of financing they will need throughout the operating loan.
For agribusinesses, it’s important to manage financing of customers appropriately, he notes.
“For instance, carrying six to nine months in accounts receivable can change your cash flow considerably,” Fike says. “Veterinarians can manage financing customers through their own lender and develop a credit policy that would set a maximum amount to carry with any one customer.”
As with most agribusinesses, veterinarians should be aware of the dynamics within the community when setting credit terms. For instance, large or influential ranchers in the area may warrant a customized set of terms based on their business. Their reputation within the community for paying back accounts receivable should factor into the credit terms, he says.
With most of its customer base in production agriculture, Fike says Frontier Farm Credit has seen an increase in loans for farmers and ranchers that are expanding. However, that increase hasn’t translated to a greater number of new veterinary customers.
Just like production agriculture, the capital needed to start a new operation from scratch can be intensive.
“With farming, like you’ll see in a vet practice or any other business, it can be hard to start on your own without having family involved working on a part-time to full-time basis because it’s so capital intensive,” Fike says.
For both lender and veterinarian, the goal in taking on debt is the additional profit or efficiency gained from what is acquired. Veterinarians should not be afraid to discuss the cost versus the benefit.
“Sit down with your lender and really evaluate what they are looking at or why,” Fike recommends. “It’s hard to pencil out the profit potential from acquiring a new piece of equipment; how much efficiency is your operation going to gain from that? As lenders, we know agribusinesses have to keep up with technology if you want to be competitive. Maybe you can’t see a piece of equipment paying for itself, but it may help keep or add to your client base. Most lenders can help evaluate those needs and help set up financing terms that will not hurt their cash flow.”
Dr. Hobrock notes another important consideration in financial partnerships is the opportunity cost for the practice owner’s time. When he started his practice, the resulting loan required strenuous reporting requirements.
“Initially, I had to take what lending I could get,” Dr. Hobrock recalls. “As our business grew, I needed more time to be a vet and less time for financial reporting.”
After refinancing with Frontier Farm Credit, he says the process was much easier and took 11 years off his payment schedule. Focusing more of his time on his clients is critical to his current and future success.
“It’s important to focus on client care,” Dr. Hobrock says. “We’re very client focused. The reason we succeed is that we care for our clients. They know they’re our source of income.”
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