When you manage your medical practice’s cash flow effectively, you can helpprepare your practice to weather both strong and weak economic times. The key to managing cash flow is the cash flow projection — a forecast of your practice’s cash receipts and expenditures.
A cash flow forecast shows the anticipated flow of money entering and leaving your practice on a monthly (or weekly) basis. With the help of this information, you’ll be able to create strategies to handle your practice’s cash surpluses and deficits and to control your overhead.
Creating a Forecast
The first step in creating a forecast is to examine your accounting records and historical patterns. For each income and expense category, project monthly cash receipts and expenditures. When you combine your practice’s cash balance at the beginning of the month with the projected net cash flow for the month, you can see if you will have a projected cash surplus or deficit at the end of the month.
Let’s say, for example, your projection for October indicates that cash expenditures will exceed receipts by $9,000 and you have an $8,000 cash balance at the beginning of October. Your deficit for that month is $1,000. Update your forecast monthly, if not weekly, using actual financial data.
What To Do with a Projected Deficit
If your projection indicates future cash flow deficits, you’ll need an action plan to deal with them. For example, you might use a line of credit, obtain a short-term loan, take steps to speed up the collection of money owed to your practice, or reduce expenses.
A line of credit will help you even out fluctuations in cash flow. A good accounts receivable tracking system should identify overdue accounts so that you can quickly follow up with delinquent patients and insurers. Stay on top of delinquent accounts with frequent calls and letters.
Reducing your practice’s expenses is another effective strategy for handling projected deficits. Some expense-reducing ideas to consider: an energy audit, a comprehensive review of purchasing policies, a reassessment of your practice’s space requirements, and a review of your current compensation practices.
Maximizing a Surplus
A surplus allows you to pay down a line of credit or invest in short-term or liquid instruments. Your bank most likely offers a variety of cash management services, such as an automated investment sweep, that can help your practice make the most of its excess cash.
An Important Tool
Cash flow projections can identify periods when cash may be tight so that you’ll have time to secure additional credit or take other steps to address the problem. CIG Capital Advisors medical practice management professionals can help identify and prioritize various measures that will help your practice run more efficiently. Specifically, we can help you review your current cash management practices and suggest possible improvements. Click here to schedule an initial complimentary phone consultation with a CIG Capital Advisors professional.
Financial statements are to accounting what CT scans and X-rays are to the medical profession: the financial health of a business or medical practice can be assessed by analyzing its financial statements. While most dentists would prefer to focus on dentistry rather than the business of dentistry, it can be beneficial for dentists (or any physician-owner) to familiarize himself or herself with the basics of financial statements.
Learning how to read financial statements allows a physician or dentist to see where the practice’s money came from, where it went, and where it is now. Dentists and physicians will want to be aware of the following three basic financial statements:
- Balance Sheet. The balance sheet provides detailed information about your practice’s assets, liabilities, and shareholder’s equity. It is a snapshot of the financial status of your practice as of a certain date. Assets are things the practice owns that have value. Assets may include physical property, such as office buildings and equipment, cash and investments, receivables, and intangibles, such as goodwill. Liabilities are amounts the practice owes to others. Liabilities can include items such as taxes owed to the government, bank loans, and money owed to vendors. Shareholders’ equity is the amount the practice would have left over if it sold all its assets for the amount appearing on the balance sheet and paid off its outstanding liabilities. This equity belongs to the practice owners.
- Income Statement. An income statement shows how much revenue your dental or medical practice generated over a specific period, usually a year. It also shows the costs and expenses that went into earning that revenue. The bottom line is the practice’s profit or loss for the reporting period. Pay close attention to the practice’s operating expenses, such as rent, utilities, and supplies. A practice that experiences a net loss may look to reduce its operating expenses in an attempt to return to the black.
- Cash Flow Statement. The cash flow statement reports the dental or medical practice’s inflows and outflows of cash during the reporting period. A cash flow statement tells you the net increase or decrease in cash. Cash flow statements are generally divided into three parts: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.
As experienced advisors, we can help you dig deeper into your numbers and show you where you can make changes that will improve your practice’s bottom line. Contact a CIG Capital Advisors medical practice management professional today for a complimentary initial consultation.
CIG Capital Advisors’ managing director Yusuf Hai authored a recent article for Fierce Healthcare where he discusses how physician-owners can assess growth metrics in their medical practice and make adjustments that may affect the practice’s value with an eye toward a future sale:
The average primary care physician sees more than 20 patients a day, according to a 2018 survey of nearly 9,000 doctors by the Physicians Foundation.
That, along with the 11 hours they devote every week, on average, to paperwork, helps explain why 78% of those same physicians told surveyors they feel burned out at least some of the time.
Oftentimes, this adds up to physicians being too busy with day-to-day responsibilities to have time left over for running the business end of their medical practice, let alone for crafting strategies to drive long-term practice growth, or to consider their legacy as they chart a course toward future retirement.
Ask most physicians about their hopes for the future and they might say that, of course, they want to grow their practice and increase revenue.
It’s one thing to set that as a goal. It’s quite another to determine how and what kind
of growth—and how much—will best suit a particular medical practice and its individual members.
Difficult as it may be, the reality is that growth won’t just result from hard work and hopes. Physicians who are truly serious about strategic growth or maximizing the practice’s value with an eye toward a future sale have
to invest in the process—possibly even setting aside an entire day or more for business building.
Either way, the process always begins with something already familiar to doctors: diagnostics.
Rather than X-rays or blood tests, doctors who want to grow their practice must begin with a panel of financial indicators: tax returns, productivity reports, an evaluation of their payer mix and more. It’s important to examine outlays, too. If a practice is spending more on equipment or staffing, or real estate, than peers of comparable size, bringing those expenditures in line with benchmarks may be the most effective treatment.
It also helps to examine the market. If your practice is in an area with an aging population, your approach to growth is oftentimes different than it would be in a location teeming with young families.
It sounds obvious, but just having the time to find those sorts of data may be well beyond the reach of the average overworked physician. That also explains why achieving growth by simply adding more patients isn’t practical.
This acknowledgment of limitations leads to questions about how best to grow. Is it more advantageous to acquire new locations and the physicians that come with them? Or does it better suit your goals to grow organically with more patients and a handpicked crop of new colleagues?
Finding colleagues who share your treatment philosophy and practice goals is vital, whether planning expansion or an exit strategy. As doctors well know, it’s not a given that those goals and philosophies will be shared. Culture fit is far more art than science, so while acquisitions or mergers may seem like an easy shortcut to growth and the added value that comes with it, they also require due diligence that goes well beyond spreadsheets.
For physicians who anticipate handing off their medical practice, the first step is also diagnostic, although in this case it is an honest valuation of the practice. This isn’t just a matter of placing a price tag on equipment or real estate, though that is part of it. Intangibles play a role, too: your reputation, and your practice’s reputation, have value as well.
For any medical practice contemplating a growth strategy, and for any physician planning a career exit, the most important thing to remember is that, just like patients, no two practices are identical. Consequently, there is no single prescription that will work for every practice.
And that is why a careful, individualized strategy is key to building and maintaining growth, whether for the purposes of seeing a practice through for the next two decades or for the next two years until a buyer arrives.
Yusuf Hai is a managing director at CIG Capital Advisors. To schedule an initial complementary consultation to discuss how you can add value to your medical or dental pratice, visit www.calendly.com/yhai.
Given the physical and emotional demands of their profession, it’s little wonder that some physicians look forward to retirement. However, many other doctors nearing retirement age are reluctant to turn their backs completely on their profession and would rather find a way to ease into retirement.
What should you do if retirement is on the horizon but you would prefer to transition gradually into retirement by working part-time? Here are some things to consider if you are thinking of cutting back on your work hours:
1. Review Your Finances
First off, determine if you can afford the reduction in earnings that reducing your work hours will entail. Pay particular attention to any debt you are carrying (mortgages, etc.). Ideally, you don’t want to be overly burdened with debt once you are no longer practicing full-time.
A review of your current net worth can give you a clearer picture of your overall financial standing. Net worth takes into account the value of all your assets as well as your outstanding liabilities.
If you’ve been funding a tax-favored retirement plan, hopefully you have accumulated sufficient assets to provide a steady stream of income for all the years you may be retired. If you still haven’t met your goal, you’ll want to determine if your earnings from part-time work will allow you to comfortably continue adding contributions to your retirement plan. You’ll also want to determine when you can start taking penalty-free withdrawals from your plan(s) and project what your tax situation will look like. These are all issues we can help you assess.
2. Look at Your Options
If you are part of a multi-physician practice, talk to your colleagues about what arrangements can be made for you to start cutting back your hours. You may need to revise your practice agreement to incorporate a new compensation arrangement. Typically, such arrangements are based on the productivity of the part-time physician less a share of practice overhead expenses.
If you are a solo practitioner, you may find it hard to practice part-time without creating problems with your current patient base. Patients may feel that you can’t deliver the type of patient care they expect if you are practicing part-time. Bringing in a physician assistant may be helpful. However, recruiting another physician who would eventually take over the practice may be the most effective route for solo practitioners.
Give careful consideration to the financial arrangements you make with the new physician. When it comes time to sell, you’ll want to have a formal purchase agreement that outlines all of the rights, obligations, and responsibilities of the buyer(s) and the seller. It should also include a valuation of the practice.
3. Consider Malpractice Insurance
Don’t ignore the issue of malpractice insurance when you are weighing the pros and cons of going part-time. You need to be certain you will be covered during your part-time years and after you stop practicing completely. “Tail coverage” can protect you against any malpractice claims that may be filed against you after you retire.
CIG Capital Advisors Can Help with Retirement Planning
Whether you are serious about transitioning to part-time work or are simply exploring your options, be sure to consult with us. We can help evaluate your personal financial preparedness for retirement and assess the need for other steps, like medical practice valuation or a partnership exit strategy. Schedule a complimentary consultation with a CIG Capital Advisors professional to discuss your specific situation at www.calendly.com/yhai.
Lay the Groundwork
Start by taking a critical look at your practice’s current financial condition. Identify areas of weakness. For example, does your medical practice experience poor collections or weak cash flow? How do your staffing levels compare to those of similar practices? Issues such as these can reduce the appeal of your practice. It’s to your benefit to deal with them well before you put your practice on the market.
You’ll want to have a realistic appraisal of your practice’s potential worth before you put it up for sale. Tangible assets, such as medical equipment, computers, and furniture, are relatively easy to value, though they generally make up only a small part of a medical practice’s total value. Goodwill is an intangible asset that can be difficult to value. But there are methods that can be used to establish a reasonable estimate.
Identify Potential Buyers
You may receive an unsolicited offer. If you don’t, consider reaching out locally or contacting a broker who specializes in selling medical practices. An experienced broker can identify and contact qualified potential buyers.
The speed with which a sale may occur may largely depend on the deal you’re seeking. Do you want a buy-out that will let you continue to practice as an employee? In that case, looking for a group practice, hospital, or other corporate buyer may be the best route. If the sale goes through to one of these entities, you will be able to continue to work in medicine without the responsibilities of ownership.
If retirement is your goal, you may opt for a gradual buy-in by a physician who will take over your practice. Typically, this arrangement requires you to employ the prospective buyer and, under the terms of the deal, after a trial period of a year or two, offer a partnership with a documented exit arrangement for you. This arrangement could be in the form of a severance package.
Review All Offers Carefully
If you receive an offer, your focus should be on the would-be buyer’s financial condition and the payment terms if you plan on retiring. If you plan to continue working at the practice with the individual or entity who may buy it, you should carefully review all ramifications, including transfer expenses and malpractice terms involved in the sale.
Apart from satisfying yourself about the financial and legal issues involved in the sale, you should also feel that you will be able to fit into the potential buyer’s organization and that your advice and input will be welcomed. Remember, whatever way your medical practice’s sale is structured, there will be tax implications.
The business advisory team at CIG Capital Advisors can help you evaluate potential medical practice sale offers and determine the terms which might make it the right deal for you. Schedule a complimentary consultation with one of our business advisory professionals today.