How Much Cash Does Your Practice Need Right Now?

Cash is the lifeblood of a medical or dental practice. Throughout this COVID-19 pandemic, I hope you would agree with me on the importance of having access to an adequate amount of cash to run your business.

Profit is important as well, but profits can be manipulated based upon several controllable factors. Cash, on the other hand, is a key indicator of the financial wellness and strength of your business.

So how much cash do you need right now?

I recommend two to four months of average monthly general overhead.

Early in my career, the amount of cash available in a professional practice didn’t seem all that important. Part of that was due to a strong economy and the fact that healthcare practices as an industry generally had healthy cash flow.

But after the downturn we experienced in 2008, I began suggesting that practices maintain one to two months of general overhead.

Today, after experiencing this pandemic crisis, I would say that practices should maintain an even higher balance yet.

Obviously, you need to strike a balance of maintaining too much cash for the sake of precaution as well. Maintaining an excess amount of cash may result in missing out on other opportunities to build your business or reach your financial goals.

But on the other hand, having enough cash to run your business in a downturn can eliminate stress.

So, to keep things reasonable, I would suggest that you give consideration to maintaining a balance of cash equal to two to four months of average monthly general overhead and error on the higher side of the range.

A formula for building your cash

There are two simple equations that summarize how cash enters a practice.

1. (Charges – Adjustments) x Collection Percentage = Collections
2. Collections – Cash Outflow = Increase to Cash

Each variable represents a lever we can pull to try and increase the amount of cash that ends up staying in your business account.

Charges

Scheduling, patient flow, documenting the work you do, and correct billing procedures all have an impact on your charges.

Having an optimized schedule that allows you to maximize the work you do in a particular month provides you with the opportunity to increase your cash.

Adjustments

Contracting with third-party payers, negotiating and setting fees, patient payor mix and office policies will have an impact on the adjustments (or reduction of your charges.)

You need to be wary of when a particular payer represents more than 20% of your business. Any hiccups in that contracted relationship could potentially have a significant impact on your charges and collections. This is why diversifying your payer mix is so important.

Collection Percentage

Financial policies, financial arrangements, front-office staff who obtain patient demographical information, billing staff who prepare insurance claims, office managers who oversee the implementation of policies and train staff all directly impact your ability to collect your net charge amount (Charges – Adjustments).

Pay attention to your A/R. If your aged accounts receivable balances are increasing each month, it is likely that your collection percentage isn’t optimal.

Cash Outflow

Fixed and variable practice expenses, debt payments, and capital improvements all impact the cash in your bank account.

Having a budget for your variable costs and reviewing your fixed costs from time to time can keep cash from seeping out of your checkbook.

Bottom line: Cash requires active management

Cash flow determines the pulse of a medical or dental practice and each requires an adequate and steady flow to survive.

Over the next 12 months, cash flow will play an important role in your ability to recover from the COVID-19 downturn. And, the only way to improve your cash flow is to manage the elements that are a part of the formula.

Managing your cash flow requires doing an analysis of the many factors discussed and looking for problem areas.

If you would like assistance to work through an analysis of these areas in an effort to increase your cash flow and recover faster from the downturn in business, give us a call.