HEALTHCARE BANKING, FINANCE, AND WEALTH
Some Key Points for Financial Projections!
As medical practices moves deeper into healthcare reform the focus on financial stability becomes even more important. What tools can a practice utilize to plan for the future?
Cash is the lifeblood of any business, and healthcare practices are no exception. Forecasting your cash inflows and outflows can help you foresee potential shortfalls and give you enough time to put a solution in place. Here’s how to create a cash-flow projection and use it effectively.
Cash vs. Profits
First, it’s important to understand that if your practice uses the accrual accounting method, a cash-flow statement will look different from a profit-and-loss statement. The former records a transaction when money is exchanged (similar to a bank statement), while the latter registers when a sale is made and expense occurs.
Project Your Inflows
There are a number of ways to find data for projections. Depending on how far ahead your schedule is booked, you may be able to draw directly from your appointment calendar. To look farther into the future, however, consider drawing on the same period as the previous year, if your income fluctuates predictably, or you can use a monthly average, if it is relatively consistent. You will also need to have an understanding of how much revenue you will see from each type of visit, what payment you expect immediately, how long various insurers take to pay and at what percentage of the amount billed you will be paid. If, for example, your insurers reimburse you in 30 days on average, you would use January’s billings to forecast February’s inflows.
Project Your Outflows
Many of your expenses, such as rent or mortgage payments, salaries and insurance, are fixed—they’re the same every month. Others, such as disposable supplies, depend on your patient volume. Again, you must consider when you actually pay bills, not when you incur them.
Match the Solution to the Issue
If you foresee potential shortfalls, you might consider financing. Generally speaking, it’s best to match the term of the financing to the term of the need. A revolving line of credit can help you bridge short-term, unexpected or seasonal shortfalls. You can draw down as needed up to your credit limit, and pay off just the amount of debt used. Any principal you pay back is available for a future drawdown. A term loan, by contrast, is a set amount with fixed monthly payments. Such a loan may make sense for large purchases, first to avoid a sharp cash outflow, and second, to align the length of the loan term to the life expectancy of the equipment itself.
While hardly a crystal ball, cash-flow forecasts can help you make decisions about the direction of your practice as well as make it more resilient to unforeseen downturns.
Consult with your financial advisor and healthcare consultant for their valued input in order to have the most accurate financial plan in place. Remember… good financial projections combined with a good business plan are the best roadmaps to the financial success of a practice and its owners.
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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.