Cash is king: Tips to elevate your practice’s cash flow

Even when we’re not in a recession, lack of cash is usually the primary reason businesses fail. Right now, many practices are busier than they want to be, despite the challenging economic times we're facing. Although focusing on cash flow management may not be the first priority on most of our to-do lists, now is the time to begin preparing for a downturn in revenue.

What is cash flow?

The definition of cash flow is simple: cash inflows are any cash received by the business, whereas cash outflows are any cash expenditures made by the practice. Net cash flow is the positive or negative amount left over, once you subtract the cash expenditures from the cash inflows.

Unfortunately, it is rare for a practice to regularly prepare or review true cash flow reports. Most tend to use a profit and loss statement, P&L, for management purposes. However, even when prepared on a cash basis, this document does not include all the items necessary to analyze cash flow. Cash inflows and outflows that aren't incorporated in a P&L include loan proceeds, the principal portion of loan payments, owner dividend payments, and purchases of equipment made with cash. A P&L also includes several non-cash items such as amortization and depreciation, neither of which should be a part of the calculation of cash flow.

It is possible for a practice to have a high level of taxable income or practice profitability but very low cash flow. This generally occurs when the clinic is using the profits or taxable income to make debt payments, buy equipment, or distribute money to owners.

Ongoing analysis of cash flow

Knowing how much cash is in the bank isn’t enough. The management team should also know where the cash comes from, where it goes, and what the expected cash position will be like 3 to 6 months from now. The most important report required to effectively manage cash flow is a monthly cash flow statement because it shows actual cash inflows, cash outflows, and the net change in cash for the period. A cash flow budget and regular comparisons between actual cash flow and budgeted cash flow are also useful for forecasting future cash inflows and outflows.

Building and maintaining cash reserves

All types of business, including practices, need a cash reserve to meet unexpected expenditures and carry them through the bad times. This reserve can come from a combination of actual cash saved in the bank and the availability of a line of credit or similar instrument. Relying solely on a line of credit is risky, as, lending terms may change or the line of credit won’t cover the entire amount needed. Maintaining a separate bank account will reduce the temptation to draw on this cash.

If you don’t have a reserve account, start now. If you do, review it to see if it needs to be increased. Regular deposits should be made into the reserve account until it is at a level that the management team is comfortable with.

How much should that be? It is commonly recommended that an emergency fund should cover 3 to 6 months of fixed expenses. Where in that range a practice chooses to aim depends on the practice owner’s risk tolerance, local and national business, economic trends impacting the practice, how much the revenue of the practice revenue is expected to drop, the amount of debt the practice has, and the ability of the practice to cut expenses if needed.

Improving cash flow

There are numerous ways to improve your cash flow. For starters, try focusing on the ones that will give you the best bang for your buck. If your practice reaches a point where there are too many open appointment slots, then focus on increasing revenue through improved marketing, expanded hours, or offering a better client service experience.

Tighten up practice spending.

One way to tighten up practice spending is by postponing major expenditures such as remodeling or large equipment purchases. The key is inventory control because many practices can reduce cash outflow by keeping less inventory on the shelves or participating in a buying group. Negotiate with vendors for longer terms or extend your current terms and/or request lower interest rates.

Take a good hard look at your staff and payroll.

This is the hardest decision most practice owners and managers will have to make (and usually one of the last). Review workflow and staff skills—can you improve efficiency so you can see more patients without hiring more team members? If you are going to have to reduce jobs or hours, involve the team in the discussion. Perhaps one team member would take a temporary leave of absence? Or, everyone would be willing to cut their hours back, or withdraw from receiving raises to preserve jobs for all?

While focusing on the big expenses is a solid place to start, don’t forget to review and eliminate additional spending. The money you save from reducing expenses can be put towards more critical expenses or into an emergency fund.

Get paid for services on time.

Do everything in your power to get paid at the time services are provided. Don’t become the bank. You and your staff should work towards educating your clients about third-party payment options. Additionally, make sure to follow up on any outstanding receivables, and be mindful about who you grant credit to.

Crack down on missed charges and random discounts.

If you're going to add or keep a discount program in place, make sure it brings in more revenue, clients, and profits than you would have had without the discount. Consider the following:

• Explore opportunities to convert credit card or other debt to very low or no interest loans if possible.
• If necessary, talk to your landlord about deferred rent payments. Few landlords are forgiving of those payments entirely, so be cognizant of when you will repay that money.
• For any loan obligations, negotiate payment deferrals or reductions if possible. Again, be cognizant of when you will have to repay that money. Will payments increase within a margin of 3 months to a year or do those payments just get tacked on to the end of the loan?

Every practice has tough times. When cash flow is tight, stay proactive to help keep your practice afloat. If you're are not currently experiencing issues with cash flow, my hope is that the above tips will better prepare you for if and when you do.

Karen E. Felsted, CPA, MS, DVM, CVPM, CVA, has spent the last 15 years working as a financial and operational consultant to veterinary practices and the animal health industry. She also spent 3 years with the National Commission on Veterinary Economic Issues as CEO. She has written an extensive number of articles for a wide range of veterinary publications and speaks regularly at national and international veterinary meetings.