When your practice has a banner quarter or year resulting in a significant profit, congratulate yourself—but don’t rest on your laurels. An occasional bounty is an excellent opportunity to strengthen your practice’s financial underpinnings for years to come.
Determine How Much You Spend
Take a look at the last 12 months of expenses, and break them down into two categories: fixed and variable. Fixed costs are those that are independent of your patient volume, such as rent or mortgage payments, equipment leases, loan installments, payroll services, malpractice and other insurance payments and so on. Variable costs generally rise and fall depending on how many patients you see. These include laundry, consumables, stationery and some purchased services. To further fine-tune your analysis, you might break down certain costs, such as payroll, into a fixed component—necessary whether you see patients or not—and a variable one, that increases the busier you are.1
Calculate Your Working Capital
This is defined as current assets (bank balances, cash, accounts receivable) minus current liabilities (taxes due, accounts payable, short-term loans and the portion of long-term loans due in the next 12 months). Divide this number by 365 to determine your daily operating (working) capital.2
Fund Monthly Operations
By separating the cash necessary to operate on a daily basis from that used for unexpected events, you’ll have a clearer sense of how much is available for each. Consider maintaining a minimum balance sufficient to cover the fixed and variable costs of your last cash-inflow month of the year in a monthly operating account, such as your primary business checking account.
Establish a Contingency Fund
In addition to your operating account, it’s helpful to maintain a separate fund that can be accessed immediately as needed. This might hold three to six months of operating cash, calculated as your daily operating capital multiplied by 90 to 180 days. Your contingency account can serve not only as a safety net but also as an investment; consider placing the funds in a liquid, interest-bearing account, such as a money market fund.3
Automate the Process
As conditions change, your contingency and operational accounts might need occasional rebalancing. When you have more than you need in your operating account, transfer the excess into the contingency fund. If you anticipate a cash flow crunch, transfer money in the other direction. Setting up your contingency fund as a sweep account can make this happen automatically by establishing minimum and maximum daily balances on your primary checking account, with any excess automatically transferred to the interest bearing account and vice versa.
Once you’ve built a buffer to protect your practice from seasonal or unexpected downturns, you’ll have a far better sense of what resources you can direct toward strategic growth, capital investment and increased personal income—all built on a solid foundation.
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By Jeff Holt, CMPE, VP, Senior Healthcare Business Banker with PNC Bank
Jeff Holt is a Senior Healthcare Business Banker and V.P. with PNC Bank’s Healthcare Business Banking and is a Certified Medical Practice Executive. He can be reached at (352) 385-3800 or Jeffrey.Holt@pnc.com.