Note: This article is the first in a two-part series on achieving better cash flows for your practice. Next month’s article will cover specific strategies to improve your cash flows.

According to a CBInsights study, https://www.cbinsights.com/research/startup-failure-reasons-top/, running out of cash is the second highest reason why startups fail. To prevent this from happening to your OD practice, it’s important to manage your cash flow efficiently. So let’s first cover some basics that every OD should understand about their practice’s cash flow.    

What is Cash Flow?

Cash flow is the money you have available at any given point in time. This balance represents the money flowing in and out from your practice’s day-to-day operations. Inflows of cash can come from patient fees received, optical point of sales receipts and insurance reimbursements. Outflows include vendor payments, rent or mortgage payments, payroll as well as owner distributions and tax payments.

How is Cash Flow Different than Profitability?

Many business owners fail to distinguish between cash flow and profitability. While cash flow relates to the actual money coming in and out of your practice, profitability relates to the amount of revenues left after deducting all expenses. It’s great if your practice is profitable, but you can still have major issues if you don’t have the money available to pay your obligations when they are actually due. This may occur if you hold receivables related to those revenues earned. So a practical challenge exists if insurance collections take too long and bills come due before money is available in the bank.

How Do Cash Flow Problems Occur?

Cash flow problems often are caused by timing issues. Regardless of your practice’s overall profitability, your available cash balance can fluctuate greatly based on when your money is actually received and paid out of your bank account. If your services and/or optical sales revenues are cyclical in nature, it may be difficult to cover your regular monthly bills during the “down” revenue cycles. That’s why the timing of your cash inflows and outflows are important to understand. 

On the other hand, your cash flow problems could be a sign of a deeper issue with your practice’s profitability. That’s why it’s important to review and understand your financial statements, to see if you need to improve your bottom line by increasing revenues and/or reducing expenses. See my article, http://fluorescene.odcommunity.com/keeps-night-managing-practices-financial-risks/, for an example of how to address your profitability risk. 

Understand Your Current Cash Flows

To achieve better cash flow management in the future, you’ve got to understand your current cash flows. For a non-accountant, this may be a little daunting, but it’s essentially a simple equation: 

Cash Flow Calculation (simplified version):

Your cash on hand at the beginning of the month

  $5,000

Plus: all your various cash receipts for the month

(list out by various types):

Optical point of sales

Patient fees received

Insurance reimbursements collected

Total Cash Receipts

 

$    500

$ 1,700

$    300

$ 2,500

Less: all the cash paid out for the month

(list out by various types):

Office rent

Utilities

Payroll

Equipment  lease payment

Total Cash Paid Out

  

 

$     600

$     200

$  2,000

$     200

$(3,000)

Your cash on hand at the end of the month

$4,500

 

Project Your Future Cash Flows

Once you start tracking your cash inflows and outflows, you’ll start to get a sense of any cyclical trends. This will help you to do the next step, of forecasting your future cash flows. By forecasting, you’ll anticipate your cash requirements, helping you to see months where you expect deficits (more cash paid out than received) and surpluses (more cash received than paid out).

Cash Forecast Tools

Users of QuickBooks, https://quickbooks.intuit.com/, can create a Cash Flow Forecast Report using the Reports feature, and there are apps available that integrate seamlessly with QuickBooks, such as Cash Flow Frog and Plan Guru. Excel also has a cash flow forecast template.

Sound Business Decisions

Cash flow forecasting enables you to make better business decisions. For example, let’s say you’re considering investing in more equipment, moving to a larger space, or expanding your optical sales inventory. Since these actions require a cash outlay, you’ll want to consider your cash flow projections before making the investment, to be confident you can cover those expenses when they become due.

Next Steps

Once you understand Cash Flow and how to do cash flow projections, you can chart a course for improving your practice’s Cash Flow going forward! In next month’s article, I’ll cover what actions you can take.

Need Help?

If you have questions and/or would like to understand more about Improving Your Cash Flow, please reach out to me, I’ll be happy to talk with you. Orin Schepps, Founder and CEO @consultanceaccounting  http://www.consultancellc.com