Although the hardest part may be recognizing that there is a problem, virtually all chiropractors will face the daunting task of managing the recovery of a failing practice or business at some point in their career.
After all, the health of a chiropractic practice is not guaranteed forever.
The need for a turnaround strategy can range from revenues that don’t cover costs, to an inability to pay creditors, to salary cuts for the principal and others in the practice. Fortunately, once you acknowledge and identify the problem, you can enact a problem-solving strategy.
Assess the situation
The first step in a course correction is to get to the root of problems and discover whether services offered are selling, if too much is being spent on unnecessary things, or too much is being spent pursuing the wrong patients. Is the practice in imminent danger of failure or is business merely declining?
Among the factors responsible for a declining practice are those that are self-inflicted, such as incompetent management or poor financial controls, both of which fall into the category of internal forces. While those that are not self-inflicted, such as government intervention, economic recession, the presence of low-cost competitors, or natural disasters are considered external forces.
Because cash is the lifeblood of any practice, cash flow should be evaluated over both the short and long term.
Obviously, a positive cash flow must be established and a sufficient amount of cash to implement the turnaround plan must be found.
Three steps to manage cash flow are:
- Increase the cash balance. Collect outstanding accounts receivable and generate cash from any saleable assets.
- Prioritize cash disbursements. Focus the available cash toward “must-pay” expenses first, including payroll and associated payroll taxes, and pay vendors with any remaining balance.
- Forecast cash. Projecting cash receipts by payer and disbursements by creditor on a weekly basis for the next three months—and monthly thereafter for a year—will provide a guide. This often means reducing the revenue and collection estimates by 10 to 30 percent to ensure the actual results are achievable and cash does not run out. Develop and implement plans to operate and stay in business at the lower projections.
Cut and control expenses
Turning around a failing practice can be tough because it requires a meticulous evaluation of where the operation’s money is being spent. Any expenses that aren’t contributing to the practice’s success should be minimized and focus put on expenditures that are really producing the desired results.
This is the time to reduce overhead expenses, renegotiate leases, cut out waste, and stop any spending on things that are not essential to survival.
Pare unprofitable patients
While losing patients can be even more worrisome than losing crucial employees, some patients are really just not worth it. Instead of tying yourself to patients who are providing little income but much heartache, it’s best to concentrate on the patients who generate the most profit. Directing your marketing efforts toward finding other loyal and beneficial patients is a good start to any turnaround.
Make sure you have the cash to finance your turnaround. Even the best plan will fail without sufficient funds. Thus, identifying the most appropriate partners to work with in restoring a practice to its former glory is vital.
This can be a mix of turnaround debt and equity capital.
It may even require buying out existing lenders if they are not prepared to fund the turnaround. Fortunately, there are specialty providers for all of these financing options.
Admittedly, no one will write a check if they aren’t sure what the potential return on that investment will be. Requests for turnaround funding should define the amount needed, what it will be used for, and the anticipated return.
Investors understand these figures are estimates; the point is to demonstrate that you’ve thought these issues through. A capital infusion from equity investors will mean the only people getting paid are governmental agencies, utilities, and key vendors. Everyone else is expected to convert what is owed to shares of the practice or take pennies on the dollar.
The first and most vocal group to deal with are the angry creditors who may have been in the dark about the practice’s financial status. If a practice is hemorrhaging cash, this must be stopped as soon as possible. Obviously, payments should not be stopped that will damage the value of the practice or encourage a creditor to take action against you.
Although patients, vendors, and suppliers will be wary about the future of the practice, if money is owed to banks or vendors, most would rather be repaid over time than take over the practice or force it into bankruptcy.
A financial turnaround plan that exhibits the practice’s viability and outlines a repayment plan and timetable, along with an explanation of how the bank’s collateral will be protected, is essential. Lenders need to see that they will receive less money should they force the practice to liquidate, or if they don’t extend the repayment terms of existing loans.
The expertise of corporate renewal professionals may be critical to the revitalization process as a once-stable, profitable, and competitive practice struggles to improve its performance. A turnaround specialist enters a practice with fresh eyes and complete objectivity. This expert can spot problems that may not be visible to a principal or practice manager and implement solutions.
Surprisingly, a turnaround manager’s experience within a particular field is often less important than experience in crisis situations when a practice is facing bankruptcy or a significant loss of revenue. Like an emergency room doctor, a turnaround professional must make critical decisions quickly to stanch the financial bleeding and give a patient the best chance for recovery.
Measuring the turnaround
In the final phase of a turnaround, the practice slowly returns to profitability. While earlier steps have concentrated on correcting problems, the final stage usually focuses on profitability and restoring equity.
Financially, the emphasis shifts from cash-flow concerns to maintaining a strong balance sheet, securing long- term financing, and implementing strategic accounting systems.
Of course, not all turnarounds succeed. The practice may have put a quick end to its disastrous losses but may never attain a viable return on investment. When this occurs, the principal may decide to sell the practice to someone else. But this outcome is not failure, as the practice may thrive and reach new heights under different ownership.
A fresh plan for the future
Are you offering the right services at the right price for current market conditions? A turnaround is the time to try new things, enact different marketing strategies, and secure alternative financing. It is also a good time to look at the broader economic conditions to ensure the practice is providing what the market wants, at a price it is willing to pay.
Far too many chiropractors, even those with years of experience, operate by intuition and fly by the seat of their pants. Once it is understood what was causing the practice to fail, develop a plan to eliminate that cause and replace it with another option.
First, however, the chiropractor must recognize there is a problem, assess its extent, and develop a turnaround strategy. Any turnaround strategy will require the help of the practice’s current advisors, and perhaps even a turnaround specialist.
Mark E. Battersby is a tax and financial adviser, freelance writer, lecturer, and author located in suburban Philadelphia. He can be reached at 610-789-2480.
DISCLAIMER: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional adviser about issues related to your practice.