Are Your Big Accounts Costing You Money?

Those who have been following this blog know that I made a New Years Resolution to improve our AR situation. We have instituted a new system that, if followed to the letter, should show immediate results in our cash flow. Of course there are always situations that require special consideration. One of those is the trainer or manager of a barn that sends a lot of work our way but is persistently over 90 days on their own account payments. The concern is that if we cut the trainer off, do we lose all the clients associated with them? Where do we draw the line?

I have prepared a simple strategy for this type of case. Let us assume that our net profit is a generous 10%, which includes the considerable amount of time it takes the office staff to chase after overdue accounts. For every $1000 that a trainer or barn manager owes but has not paid we need to bill and collect $10,000 from their clients in order to not lose money in that barn. It would take another $10,000 billed and collected from the clients to reach an overall 5% profit. Keep in mind we would need to collect within 30 days from all clients associated with the trainer. Anything over that will start to diminish the profit margin. In effect we have to work twice as hard to earn half as much money.

To add insult to injury, if you pay your veterinarians on production you are paying them for money you are not collecting when they do work for the non-paying trainer. I’m getting depressed thinking of the handful of trainers in our practice that haven’t paid their bills and the ramifications of their delinquency.

So what is the solution?

First of all, we are lucky that our HVMS software allows us to pay our veterinarians based on collected receipts. We know they are not running up bills with bad clients to pad their commission and they trust us not to send them to clients who won’t pay their bills. Secondly, we identify the trainers and barn owners/managers who haven’t paid us. Then we pull up their clients and determine how much work they do with us each year. Using the 10% net profit rule we can then figure out how much work we need to do to break even on the trainer or barn owners account. For example, consider a trainer whose unpaid bills add up to $5000. You need to bill $50,000 to just break even on their account!! What if the client billings add up to less than that? You are losing money. Even when the economy is great nobody can afford that.  Finally, think of how much time your office staff spends chasing after those accounts. We have calculated that it costs us $10,000 annually in labour costs to chase bad accounts. Using the 10% rule, if all our clients paid at the time of service or at least within 30 days, we could eliminate $100,000 of bad accounts annually and still earn the same amount of money at the end of the year based on cost savings.

Wow. When I look at it this way I am determined to end our subsidies to trainers and barn managers/owners that can’t pay their bills. It can be very glamorous and ego-boosting to work with big name trainers but this does not necessarily translate to improvements in your bottom line. I prefer not working for free. I love the other trainers who pay their bills promptly and run their operations like the business that it is. Lets reward them by being more available and offering better service because we have created that opportunity by eliminating dead wood. The flip side is that if we can get this slow or non-payers to start making regular payments there would be a huge upside to your practice profitability. Does anyone have any ideas or proven methods on how to make that work?