Professionals in private practice have the primary responsibility for managing their business finances, whether or not they are aware of this fact. Poor financial management is one of the leading reasons that businesses fail and it is not something that you can leave to your banker, financial planner, or accountant.
You need to understand some fundamental principles yourself, apply them on a daily basis, and exercise discipline in your financial decisions. We outline a three step process below that will help you manage your cash flow.
After you become familiar with the concepts, make a phone
call to your accountant and tell him or her that you would like a cash
flow budget prepared. In most cases, the figures your accountant has from
the previous year will prove to be an excellent starting point.
Getting a handle on the following questions will give you a head start for the task at hand. • How much cash does your practice need to operate for the next calendar month? • How much do you expect to collect in the next month? • Do you pay estimated taxes regularly? • Do you maintain a cash reserve for unanticipated difficulties?
The first step in cash flow management is to identify the components that affect the timing of your cash inflows and cash outflows. The amounts you pay for rent, salaries, equipment, supplies, and utilities make up the bulk of your outflows. For the most part, these expenses are predictable. Remember that there are also expenses which come up unexpectedly.
Inflows are the movement of money into a business. Using
the example of a medical practice, the following components will affect
inflows: 1. the percentage of patients who pay up front in cash, 2. the
number of weeks or months that elapse before third party payers reimburse
you, 3. the steady payments you receive from HMO's, and 4. seasonal variations
in patient traffic.
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A cash flow budget details the anticipated cash receipts and disbursements on a monthly, or a quarterly basis. You pick the breakdown that will be the most useful to you. The budget also projects over a period of time, for example, one year. If it goes into great detail and far into the future, it is a business plan.
The bottom line figures of your cash flow budget (revenue minus expenses) will give you an indication of the business's ability to support you, the business owner. The figures will also enable you to make informed decisions about investing in additional resources in order to expand.
A realistic budget will help you to predict cash flow gaps. These are periods when cash outflows exceed cash inflows. The budget may also point out problem areas that create unnecessary shortfalls. The key to cash flow management is narrowing or closing the gaps.
Cash outflows and inflows occur at different times. You may have had a great year end, only to start out the new year totally flat, and then have some equipment break down. A professional practice can anticipate a cash flow gap during its slow season and plan to fill the gap with cash surpluses from a prior peak. Planning for gaps and surpluses will leave you way ahead of the game. Cash flow gaps can be temporarily filled by cash reserves, lines of credit, bank loans, credit cards and personal savings. Depending on interest rates, your credit standing, and the urgency of your situation, some options will seem sensible and others inappropriate.
Proper planning, guided by a well thought out budget, will almost inevitably allow you to improve your available choices. This might include not hiring extra help, or investigating the best sources to obtain financing. Your cash flow will also improve if you 1. accelerate your cash inflows, 2. delay your cash outflows, and 3. minimize your expenses.
Staying on top of the collection process, using the credit extended by your suppliers, and keeping a lid on unnecessary expenses will improve your cash flow.
No matter how skilled you are at delivering your services, you will enjoy very little of your hard-earned money if you don't know how to keep track of it. This includes collections, bookkeeping, spending and investing.
Copyright 1994-2006 Gary Gauthier, Esq.