Cash-flow fundamentals
By Mark E. Battersby

Cash flow of chiropractic practices is hardly a topic of general conversation, but it should not be left to the “number crunchers.” After all, your practice’s cash flow is an important measure of your success.

Cash flow can be best described as the bloodstream of the operation. Cash flows into the practice from sales of services and/or products. Money flows out of the practice as supplies, products, salaries, etc., as you pay for them.

An adequate cash flow means a steady flow of money into the practice in time to be used to pay those bills. How well you manage the cash flow can have a significant impact on your profits.

Cash inflows are the movement of money into the practice and result largely from the sale of services to patients and clients. Proceeds from reimbursements and even bank loans are considered cash inflows. Extending credit to patients allows them to pay for those services later and delays the actual inflow until those patient accounts are collected.

Outflows are the movements of money out of the practice, usually as the result of paying expenses. Purchasing fixed assets, paying back loans, and paying the operation’s bills are all cash outflows.

In a perfect world, you would experience cash inflow every time you have an outflow of cash. Unfortunately, this occurs very rarely in an imperfect business world. Thus, the need to manage the cash inflows and outflows of your chiropractic practice.

A MORE REWARDING CHORE

More often than not, your practice’s cash inflows will lag behind its cash outflows, often leaving the practice short of money — a gap — for weeks, months, or even years.

When you manage cash flow properly, you narrow or close the gap before it reaches a crisis stage. This is usually accomplished by examining the different items that affect the operation’s cash flow — and looking at the various components that directly impact on cash flow. This analysis can provide the answer to important questions such as:

• How much cash does the practice have?

• How much cash does the practice need in order to operate — and when is it needed?

• Where does the practice get its cash and spend it?

• How do the operation’s income and expenses affect the amount of cash needed to operate the practice?

BUDGETING CASH FLOW

The primary purpose of a cash-flow budget is to project the inflows and outflows of the chiropractic practice over a period, typically on a month-to-month basis. If necessary, that cash-flow budget could also predict the cash inflows and outflows on a weekly or daily basis.

Because of the uncertainty involved in the cash-flow process, attempting to project too far into the future often proves less than satisfactory. At the same time, a cash-flow budget that doesn’t look far enough into the future will not help predict future events early enough to enable corrective action. Naturally, if the practice is applying for a loan, a cash-flow budget that extends for several years may be required.

A six-month cash-flow budget can minimize much of that uncertainty and predict events early enough for you to take corrective action.

With a six-month cash-flow budget you can predict your practice’s cash-flow gaps and be prepared to take corrective action, such as lowering the amount of your practice’s accounts receivable or looking to outside sources of cash, such as a short-term loan.

FORECASTING SALES

Forecasting revenues is an inexact science. Few income or sales forecasts match actual inflow because of the many variables that ultimately affect the final amount, such as the economy, inflation, competitive influences, and other variables that impact actual income or sales. Despite these variables, however, a sales forecast is a necessity.

Use your practice’s previous year’s income or sales figures as a starting point for a forecast. Last year’s sales amounts provide enough insight to predict seasonal fluctuations or cash-flow trends.

Projecting the cash receipts portion of a cash-flow budget usually means using cash inflows shown on the sales forecast. If the practice accepts only cash, then projected cash receipts will equal the amount of sales predicted in the sales forecast.

Projecting cash receipts requires considering the collection of accounts receivable and the timing of those collections.

Projecting cash outflows involves projecting expenses and other cash outflows over a similar time frame.

Remember, however, the cash-flow gap in most practices represents only an outflow of cash that might not be covered by a cash-flow inflow for weeks, months, or even years. Any practice, large or small, can experience a cash-flow gap — it doesn’t necessarily mean the practice is in financial trouble.

In fact, some cash-flow gaps are created intentionally. That is, you or your office manager will sometimes purposefully spend more cash to achieve some other financial results.

You might, for example, purchase extra inventory to meet seasonal needs or to take advantage of a quantity or early-payment discount, or you might spend extra cash to expand the practice.

For some practices, cash-flow gaps are unavoidable, such as regular seasonal fluctuations. The practice may experience cash-flow gaps during its slow season and later fill the gaps with cash surpluses from the peak part of the season.

Cash-flow gaps are often filled by external financing sources, such as revolving lines of credit, bank loans, and trade credit.

IMPROVING CASH FLOW

Accelerating cash inflows improves overall cash flow. After all, the quicker cash can be collected, the faster the practice can spend it. Put another way, accelerating cash flow allows your practice to pay its own bills and obligations on time, or even earlier than required. It may also allow the practice to take advantage of trade discounts offered by some suppliers.

An important key to improving the chiropractic practice’s cash flow is often as simple as delaying all outflows of cash as long as possible. Naturally, your practice must meet its outflow obligations on time, but delaying cash outflows makes it possible to maximize the benefits of each dollar in the practice’s own cash flow.

The proper management of cash outflows requires tracking and managing the operation’s liabilities. Managing cash outflows also means following one simple, but basic rule: Pay your bills on time — but never pay bills before they are due.

Today, chiropractic practices of all sizes are spending more time trying to cut expenses to improve the bottom line — or just to remain competitive. The cash flow analysis, projection, and, most important, the management of the chiropractic practice’s lifeblood — its cash flow — are essential.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult your professional advisor about issues related to your practice.