Many practices of all sizes have trouble paying the bills or making payroll from time to time. If your practice has tight cash flow, it effectively means that there is not enough cash in the practice to pay both the practice’s bills and the owner(s) their desired income. If cash is tight in your practice here are four possible reasons and what to do about it.
1. You have a smaller practice with a low net income. For practices with less that $750,000 in collected gross revenue, a practice net (all the pay available to the doctor(s): salary, benefits, distributions and non-cash expenses like depreciation) under 25% of revenues will typically mean the practice runs tight on cash, at least some months of the year.
For these practices, it’s unlikely there are many expenses to cut that could free up extra cash flow. More likely, the best solution is to focus on continuing to grow the practice revenues, which will typically also increase the practice’s net income. Also, consider compressing your schedule into as few patient care days as you can. Take the additional time and either work on growing the practice or pick up some work outside the practice to supplement your income while you grow your patient base and revenues.
2. Your cash flow is being drained by debt service, even if your practice net (on the P&L) looks healthy. Sometimes, owners or partners base their income just on the P&L and forget that the principal portion of their debt service only appears on their balance sheet and cash flow statement. First off, before you take on debt, remember that any borrowing needs to translate to increased revenues and profits, and new equipment purchases should be able to pay for themselves in short order. In short, the revenue a new instrument produces should more than cover the loan or lease payments.
Second, set your regular salary low enough that you’re able to pay bonuses on a monthly or quarterly basis, and base your bonuses on the cash in the checking account, not the P&L net. You should have a target for cash reserves and use that as a guide for when and how much you can bonus yourself.
Thirdly, if you have excessive credit card debt or a line of credit without a plan to pay them down, ask your bank about restructuring the debt into a fixed installment loan. That way you have a monthly payment you can plan around, and you might actually put LESS money toward the debt on a monthly basis than you would if you were rushing to pay it down.
3. You haven’t adequately planned for your taxes. Remember, from the profits of your practice, the government gets paid first, your creditors second, and then you get to pay yourself. Have a separate account for tax reserves to which you contribute every month so that you don’t have a big shock to your bank account every quarter, or even worse, once a year.
4. You pay yourself all of your expected income every pay period. The final way cash might be tight is if you base your regular pay on your total expected income for the year. Let’s say you expect to earn $240,000 this year. If you pay yourself $20,000 per month ($240,000 ÷ 12), chances are you’ll end up with tight cash at least a couple of times a year. Why? Because your practice’s revenues vary month-to-month. And busy months are usually followed by slower months when the busy month’s lab bill comes due. Your practice revenues and profits will vary; set your regular salary accordingly. Again, you should be able to pay yourself a bonus monthly or quarterly.
Cash flow is the lifeblood of your practice and a key driver of practice value. When it’s tight, it can be a major source of stress and anxiety. Use these tips to reduce stress, smooth the cash flow of your practice, and give more structure to your income.
Nathan Hayes is the Practice Finance Consultant for IDOC. He is a 10-year veteran of the eyecare industry, working at HMI Buying Group and Red Tray, Prima Eye Group from its inception and now IDOC. In his current role, Nathan helps OD practice owners manage their overhead, grow practice revenues and profits, and maximize their personal income, free time, and professional satisfaction. For questions or comments about this article, please contact firstname.lastname@example.org.