Simply put, cash flow refers to the amount of money and cash-equivalents flowing in and out of a medical practice at any given time. Managing cash flow effectively is important because it allows practice owners to cover expenses and pay bills on time, keep operations running smoothly, and maintain a healthy level of liquidity.
Factors affecting cash flow
In a perfect world, cash flow would be easy to maintain because incoming and outgoing cash would remain steady from month to month. However, there are some factors that can impact cash flow over time, such as:
Fluctuations in patient base - If you lose or gain a number of patients in short succession, you’re likely to see changes in the amount of cash flowing in or out of your practice.
Increased monthly/seasonal expenses - Irregular costs such as equipment purchases, renovations, and other one-off bills can negatively impact cash flow.
Tax liabilities - Having to pay more tax than expected will likely see your surplus cash flow take a hit.
Any unforeseen expenses can affect your cash flow, but with proper planning, they need not negatively impact your daily operations.
How to manage cash flow effectively
Although there are many situations that can see you dipping into your cash reserves, the good news is that with the right cash management approach, you can continue to build your business and repay debt regularly. Here are some of the key steps to maintaining a stable cash flow.
Conducting a cash flow analysis for your practice is important, as it takes the guesswork out of understanding where your money is coming from and going to. You might have money in the bank, but it doesn’t necessarily mean those funds are a surplus. Preparing a cash flow statement allows you to see the ins and outs of your business during a defined period. Cash is inherently quantifiable, so it gives you an insight into your overall business performance in ways that less tangible assets can’t provide.
The equipment you choose for your practice is crucial to your daily operations, but buying new equipment outright can be a significant financial burden. Equipment finance and hiring options give you more room to breathe with your cash flow by allowing you to choose flexible repayment options. There are several equipment finance options:
- Lease – your lender owns your equipment while you rent it over a period of time
- Chattel mortgage – you own the equipment, and your lender provides the finance for you to purchase it
- Asset purchase – your lender owns your equipment while you rent it over a period of time, and you have the option to purchase the equipment during the lease period.
Choosing the right equipment hire or finance option means you can spread out payments over time and maintain a steadier cash flow.
Even the most effectively run medical practices experience cash flow shortages from time to time. Enabling an optional overdraft on your business bank account means you’ll have access to additional money when you need it, such as when you have to pay bills. You can then pay off the credit used when your cash flow is at a surplus again.
When setting up a medical practice, choosing a tailored loan repayment option can help you manage your cash flow more effectively during the initial stages of business growth. Some medical finance providers offer loan repayments that start low and increase in line with greater cash flow. This gives you the freedom to spend cash on necessary investments and set-up costs while your medical practice is getting off the ground, and pay back debt at an accelerated rate once you’ve established a steady patient base.
If you’re in the enviable position of dealing with surplus cash, you might be wondering how to use it. The short answer is that it depends on where your business is at in terms of growth and your particular circumstances. Reinvesting surplus cash back into the business in the form of improved technology, equipment or training can help propel it forward. On the other hand, you might find that depositing your money into an easily accessible savings account is the smartest decision because you’ll have the flexibility to access it when you need to pay expenses down the track.
The information contained in this article (Information) is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions.