Understanding Cash Flow: 4 Strategies to Increase Working Capital in Your Practice

Cash flow is the most important measure of the financial health of your practice. Healthy cash flow means that you have more money coming in than going out. A steady stream of cash allows you to pay your staff and your bills on time. In this post, we’ll cover exactly why cash flow is so important, where you can find it on the monthly financial statements, and four strategies you can take to improve the cash flow of your healthcare practice.

• What is cash flow?
• Why is cash flow important?
• Why is cash flow more important than net income?
• How is cash flow calculated on my financial statements?
• How much cash should I keep on hand?
• 4 strategies to increase your working capital
  • Enforce your financial policy
  • Increase price transparency
  • Maintain accurate credentialing files
  • Improve your coding and get reimbursed timely
• Conclusion

What is cash flow?

Cash flow is the movement of money into and out of your practice.

It is a measure of liquidity. In other words, it tells you how much money you have available right now to pay off debts, pay expenses, and reinvest into the practice.

Why is cash flow important?

You might think of cash flow like a water tank. Water comes in at the top and drains out the bottom. The water coming in at the top is your professional receipts. And the water draining out the bottom are your expenses like rent, supplies, and payroll. 

To stay in business, your water tank must never run dry. Therefore you need more water coming in the top than going out the bottom.

Monthly bills are paid out of the cash flow. If you don’t have enough water in the tank to prime the pump and cover your monthly expenses, then your practice will cease to be able to generate revenue.

Why is cash flow more important than net income?

Businesses go bankrupt because they can’t pay their bills, not because they are unprofitable for a short period of time. 

The difference between net income and cash flow is due to a subtle difference in how some expenses are calculated. The income statement can sometimes be misleading if you don’t have a firm understanding of accounting principles. Expenses on the income statement are not necessarily the same thing as cash payments. 

Depreciation is a perfect example. Depreciation expense reduces your net profit on the income statement even though no cash may have been paid out in that period.

Therefore, if you record a lot of depreciation or accrued liabilities in a given period, you may have an underwhelming net income. However, that’s not indicative of what money hit your bank account according to the cash flow statement.

Cash flow strictly looks at cash coming into and going out of the practice. It’s an accurate representation of the money paid and collected. This is what directly affects your bank account.

How is cash flow calculated on my financial statements?

Your accountant should provide you with three financial statements each month: The income statement, balance sheet, and the cash flow statement. These three statements all tie together.

For the purpose of this article, we’ll focus on how the income statement links to the cash flow statement.

Creating the cash flow statement

First, start with the income statement. The income statement shows all of the practice’s revenues and expenses for a given period. 

The income statement breaks out different forms of revenue and expenses so that we can analyze the practice and make better decisions. We organize our income statement to show healthcare providers their general overhead and their professional overhead separately. 

When all revenue and expenses have been accounted for, the result is net income. Net income should help us answer the question, “Is the practice profitable?”

Net income then becomes the starting point for the cash flow statement. Adjustments are made to reconcile expenses that do not represent actual cash payments. 

Remember, depreciation is one example of an expense that reduces net income on the income statement but is not a real cash expense.

After all the adjustments are made, you’re left with the total change in actual cash for the practice. This is the amount that either goes into or is paid out of your bank account. 

You can get an idea for how this works in the example below:

How the cash flow statement is organized

The cash flow statement is organized to summarize the effects of cash on three activities: Operations, Investments, and Financing.

Operating Activities is the key source of a practice’s cash generation. This section represents all of the cash that the practice produces internally. 

Cash flow due to operating activities starts with net income and then makes adjustments for non-cash charges (e.g. depreciation) and other increases and decreases to working capital items.

Investing Activities include the disposal or acquisition of noncurrent assets, such as purchasing furniture and equipment for the practice. 

Financing Activities generally includes the cash inflow or outflow due to borrowing and repaying debt. This could be a loan from the bank or a personal loan you make to the business.

How much cash should I keep on hand?

A practice won’t immediately go bankrupt if it’s not profitable. But it will if it cannot pay the bills. 

This is precisely why managing your accounts receivable and monitoring your cash flow is so important. Liquidity, or having cash available to operate the business month to month, is critical to ensure that your practice runs smoothly.

So how much cash should you have on hand?

We generally recommend that you maintain a cash balance of at least one to two months of average general overhead. This will vary based upon your specific needs.

This cash reserve is often called working capital. It’s wise to set aside this type of rainy-day fund to keep cash flow constraints at bay.

4 strategies to increase your working capital

Now that we know how important cash flow is to our practice, it’s time to ask ourselves, “What can we do to increase our working capital?”

Remember the water tank metaphor? Cash flow is nothing more than money in minus money out. You increase the amount of water in the tank by either accelerating the flow of money into the practice or limiting payments going out.

For most healthcare practices, cash flow difficulties usually arise from a weak revenue stream. 

Unfortunately, working with big insurance companies and billing patients who have high-deductible health savings plans can make timely collection difficult. 

But there are strategies that can help…

1. Enforce your financial policy

Your financial policy should be your go-to tool for communicating payment expectations with your patients. But it must be up to date, easy to read, and distributed effectively for it to work.

Start by reviewing your financial policy for co-pays and deductibles. Are your payment requirements clear and up to date?

I suggest that you require every patient to pay their co-pay or deductible in full immediately after their treatment. If that’s not possible, then have them sign a payment plan that provides your office with a method to collect the payment in equal installments by way of a bank or credit card. 

Next, review how your financial policy is distributed. Do you provide a copy with every bill? How about every patient visit? Is it found easily on your website?

Be intentional about increasing patient awareness and holding them accountable to your financial policy. Doing so will help reduce the amount of accounts receivable that become past due, or get written off.

2. Increase price transparency

According to InstaMed’s Trends in Healthcare Payments Report, 92% of patients want to know their payment responsibility prior to their visit. 

As high-deductible health savings plans rise in popularity, more patients are seeking transparency and flexibility when paying for their healthcare expenditures. To meet this demand, doctors and dentists need to identify scalable ways to make accurate patient estimates.

Andrew Harding, vice president of customer success at Rivet, suggests five steps you can take to speed up patient collection and improve your cash flow.

1. Review the layout of your patient estimate or patient statement. If it doesn’t make sense to you, it definitely won’t make sense to patients.
2. Focus on verifying insurance benefits in advance of the visit so you can be aware of high-deductible health saving plans or even patients with inactive coverage. Leverage electronic verification wherever possible.
3. At a minimum, be prepared with the insurance allowables for your most common procedure codes. Although having a system in place to automatically help with this is much more efficient, knowing what your insurance allows is a step in the right direction.
4. Work with your patient access department, physicians and healthcare providers to ensure all parties are in alignment prior to discussing estimated costs with a patient.
5. Change scripting at point-of-service or during pre-registration to make patients aware of possible liability and even suggest collecting payment in full, down payments or establishing payment plans, prior to the patient’s visit with their physician or healthcare provider.

As the burden of healthcare costs shifts increasingly onto the patient, healthcare practices must be prepared with improved collection strategies. Increasing your billing transparency is one way to encourage better cash flow.

3. Maintain accurate credentialing files

As any doctor or dentist who works with insurance companies know, credentialing is the first step in the revenue cycle. Insurance companies use the credentialing process to verify your education, training and professional experience before they add you to their network.

You will not receive in-network reimbursement if you’re not credentialed with a patient’s insurance provider. Therefore, it’s important to maintain your credentialing files with all of your patient’s insurance companies.

When patients change their insurance, they don’t always volunteer the information. But these changes often affect their coverage, deductible, and copay. So it will be up to you to collect a copy of the insurance card every time a patient visits your office. 

It’s also a good idea to review your listing of credentialing renewals regularly. If your provider status expires, your reimbursement may be delayed or denied.

4. Improve your coding and get reimbursed timely

Have you become a victim of the “I’ll fix it later” mindset? It’s easy for practices to get buried in the day-to-day administrative tasks that coding and billing accurately sometimes gets overlooked. It’s not uncommon for staff to send claims to payers and then cross their fingers and move on to the next stack of tasks. 

But the ramifications of improper coding and billing on your cash flow can be disastrous. 

Here’s a vivid example from an MGMA article:

The average denial rate for most practices ranges from 5% to 10%. For a small practice of two providers that submit 2,000 claims a month with an 8% denial rate, this results in 160 denied claims a month. Even at a charge of $100 per claim this equates to $16,000 a month in denied charges – not to mention any rework costs on average $25 per claim. 

Preventing denials is not only a cost-saving but can also vastly improve your cash flow by reducing the time it takes for you to get paid. The good news is that studies have shown that 90% of denials are preventable. 

Here are five best practices to prevent denials…

Verify insurance prior to service. The main reasons for denials are due to ineligibility. When a patient changes insurance, they rarely volunteer the information. This means that it’s up to you to verify their insurance before every visit.

Get to know your payers. Each insurance company will have different rules for what services they allow and how they will reimburse. It’s your business to know each contract so that you get paid fairly and on time.

Accurate documentation and coding. Without proper documentation, it will be impossible to bill for the appropriate CPT or ICD-10 code. Downcoding a procedure can result in a significant reduction in revenue. 

For this reason, it’s important to stay up to date and educate yourself on how to document correctly. Then work with a professional coder to code those procedures based on your documentation.

Leverage technology.

Not all practice management and billing systems are built the same. Some are better than others. But most practices don’t take full advantage of their current system’s capabilities.

Many systems have the ability to review claims for errors before they get sent to the payer. Conduct an audit of your EHR system if you suspect that it could do more to help automate the billing process. Catching errors on the front end of a claim can reduce the reimbursement lead time significantly and improve your cash flow.

Monitor and analyze repeated mistakes. Do you know the #1 reason for your claim denials? You cannot make meaningful improvements without knowing what’s going on today. 

If you don’t know, ask your biller to document your top reasons for claim denials. Then learn from your mistakes by implementing processes that reduce their frequency.

Conclusion

Healthcare providers must stay on top of their cash flow. It’s the most important measure for the financial health of their practice. 

If you’re struggling to improve your cash flow, talk with a certified healthcare business consultant. We can help you identify the source of the problem and implement focused improvements to get you back on track.