Cash Flow: The Financial Measure that Keeps Your Practice Alive

You’ve been working harder than ever. Your practice is so busy you barely have time to breathe, let alone take a lunch break. Your revenues are up and you have a healthy flow of new patients. Your practice is growing—but you find yourself in a cash crunch every month, and you just can’t figure out why.

If that scenario sounds familiar, you just might have a cash flow problem. Specifically, a negative cash flow problem. It’s why an otherwise thriving practice may struggle to pay bills. It’s why, even though you’re making a profit, you can’t afford bonuses this year. It’s also a big reason why small businesses fail. They may have plenty of customers, but they simply run out of money. There’s not enough cash—for rent, for payroll, for utilities, for insurance—to keep the doors open.

“The money that you physically take to the bank is the only thing that matters.”—Mick Kling, OD, Impact Leadership

The good news? If you catch your cash flow problem in time, you can turn things around. Sure, it takes some financial know-how, but not much more than your personal finances require. So let’s pull back the curtain, and find out all about this maybe mysterious, sometimes insidious financial measure.

Cash Flow: What It is, What It’s Not, How It Works

The thing about cash flow is that many practice owners confuse it with other, seemingly similar financial measures. That can lead you to believe that your practice is humming along just fine—when it’s not.

Cash flow is not revenue.

Revenue is the income you take in from your normal operations—providing eye care. High revenues are nice to look at, but in reality, not all that useful as a measure of financial health. For example, if you have high revenues that you then use to pay high expenses, you’ll have little cash left in your bank account at the end of the month. The cash is flowing into your practice, but it’s flowing out just as quickly.

Cash flow is not profit.

It is entirely possible to turn a profit, yet have poor cash flow. How? If your practice uses accrual accounting, you recognize income as it is earned (i.e. when you bill for an exam) even though you haven’t yet been paid. You can’t use that income to pay staff or buy goods. Until those payments are in your bank account, you can’t count it as cash on hand. “Taxes—that’s the only reason accountants run a profit and loss statement,” says Mick Kling, who conducted several sessions about financial management at SECO 2018.

So what, exactly, is it?

Cash flow means exactly what it sounds like. It’s a month-to-month measure of how cash (paper cash, checks, credit card payments) is flowing into and out of your practice. You could think of it as a checking account. If there’s more money coming in than going out, the balance is growing—you have positive cash flow. If there’s more money going out than coming in, the balance is depleted—that’s negative cash flow, and if nothing changes, you’ll eventually run out of money.

Why is cash flow important?

Cash flow is the lifeblood of your practice. You need cash on hand to pay bills, pay your staff, and purchase supplies. You also need cash to reinvest in your practice—say, by remodeling your lobby or adding a lane. But there’s another reason cash flow is important: it determines the value of your practice. And if you want add a partner or are looking to sell, merge with, or acquire another practice, that value is very important.

The value of a practice is represented by a multiplier, and that multiplier is based on net cash flow (i.e. 3X net). That’s why a practice pulling in $600,000 in revenue with a 32 percent net cash flow can have a higher value than a practice pulling in $1 million in revenue and an 18 percent cash flow. If you have consistently decreasing or negative cash flow, that’s usually unattractive to potential partners and investors.

How to Track and Improve Your Cash Flow

You can run a monthly cash flow statement. That statement will “show you how much cash you generate and use over time,” notes Kling. The report will list your cash flow from normal business operations, cash flow from investments (i.e. adding or replacing a piece of equipment), and cash flow from financing (any loans you may have). Those separate cash flows are combined to determine your net cash flow: the difference between the cash you had at the beginning of the month, and the cash you have at the end.

How can I improve my cash flow?

Reading your cash flow statement each month is fine, but what you really need to do is compare the cash flow statements from one month to the next, over an extended period of time. That way, you can spot the troubling trend of regularly decreasing cash flow. But there’s a caveat: the cash flow statement tells you how you did—it’s a lag measure and you can’t do anything about it. It can reveal a cash flow problem, but pinpointing its cause and figuring out what to do about it is up to you. Here are some of the most common culprits:

Too many days in accounts receivable

If you’re not collecting patient payments quickly enough, your cash flow will dwindle. Plus, you may eventually have to spend more money to collect those receivables. Make every effort to collect patient payments at or before the time of service.

Too few days in accounts payable

The key to cash flow management, according to Kling, is “collecting as fast as you can and paying as slowly as you can.” Space out your bills to reduce fluctuations in your bank account, he recommends. If you find that you have many recurring bills due all at once, try to adjust your due dates. And if you can, match them to when you know cash is available (i.e. when you get that check from VSP).

Too much inventory

If you’re overstocked, there’s basically income sitting on your shelves getting dusty. From surgical supplies to frames, you must carefully track your inventory to ensure that you have only just as much as you need. That way, you can put the money you would have spent on overstock to better use.

Your people costs are too high

Do you have the right ratio of FTE staff to providers? Reducing the number of staff can improve cash flow in the short run, but it will stymie growth in the long run. Restructure your scheduling to avoid staff downtime and overtime.

Your cost of goods (COGS) is too high

Kling recommends keeping your combined cost of goods and cost of people below 60 percent of your revenue. Some consultants will recommend you put optical staff under COGS, but Kling disagrees. Your COGS will go up and your people cost will go down, he explains. It’s just shifting costs, he adds.

Too many denials

Denied claims mean that you’re delaying or even losing income (if appeals fall through the cracks). Plus, your spending staff resources to work all those appeals. Submit clean claims the first time around.

If you have negative cash flow for a month, don’t freak out. This could happen if, for example, you have a large, one-time expense, or if several physicians are on vacation. If negative cash flow becomes a pattern, that’s the time to worry.