Managing Cash Flow

It’s not enough to make more than you spend—practices must also keep a close eye on cash flow.
Managing Cash Flow

Managing cash flow is a challenge for all small-business owners. But with proper planning and insight, cash flow crunches can be avoided. Cash flow planning—or forecasting—starts with a budget. A surprising number of practices do not work with budgets, perhaps because the idea of creating one can seem overly complex. Yet budgeting does not need to be an extensive process. Existing practices can look at their historical data and use that to make a simple projection of revenue and expenses.

Most expenses are known—or fixed—and therefore easier to project. These include rent, salaries, malpractice insurance and website costs. Other expenses are variable based on production and sales. These include inventory such as fillers, sutures and equipment disposables. Forecasting revenue is naturally more difficult than determining fixed costs. A simple rule of thumb is to under-project revenue and over-project expenses. This conservative approach leads to far fewer headaches in managing cash flow.

Creating a Cash Flow Budget

A cash flow budget begins with projected revenue. An established practice can look back two or three years to get the best estimate of how it will perform going forward. All things being equal, it is advisable to project income at 5% to 10% less than the previous year. If the previous year was a “banner year,” average the prior three years to project revenue. For physicians starting out in private practice, it is prudent to seek outside assistance from advisors with experience in your specialty when anticipating costs and revenue.

Next, the practice must project expenses—start with last year’s figures and determine if they should be adjusted. For example, salaries are based on the projected number of staff and include the cost of benefits; therefore, practitioners should watch for increases in health insurance as those expenses generally increase annually. Rent, on the other hand, should be a known number.

Variable expenses are tied to projected sales. Again, look at the practice’s historical data for guidance. One strategy is to multiply the cost of a product by the projected number of units sold; another method to determine projected cost is to multiply the revenue by the markup amount. For example, if skincare products are marked up 50%, then multiply the projected revenue by 50% to estimate the cost. Don’t forget to budget for planned, non-recurring expenses such as equipment purchases, upgrading the computer system and/or new carpet for the office.

Preparing for Gaps in Cash Flow

Anticipated seasonal variances must also be factored into the budget. Therefore, preparing a monthly budget is wise. If August is historically the practice’s slow month in terms of revenue, a natural cash flow deficiency may occur. With proper planning, cash can be held back each month to prepare for more cash-lite months.

One mistake physicians often make is bonusing out all of the cash to themselves. To build a cash reserve, start by not distributing all the cash to the owner(s). A prudent approach to physician bonuses is to take revenue minus expenses, less a cash reserve. The reserve needed will vary from practice to practice but, generally speaking, one month’s expenses in reserves is safe.

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