For Whom the Bell Tolls: 101 Cash Flow Ways to Kill Your Practice

Holly Hosford-Dunn
April 24, 2013

If a business is constantly struggling with its bottom line, this could create long-term problems from which it might not recover.  

How dreary.  I promise to move to more upbeat topics soon. But for now, it’s Cash Flow problems–shorthand for “constantly struggling with the bottom line.”  Cash Flow was discussed in general last week and we’re into specifics this week.  There are different kinds of cash flow in businesses (operating, investing, financing), but operating cash flow problems are those typically faced by independent dispensing practices.   As examples: 

  • Start-ups.  It’s hard to start a practice with enough cash to run things when you don’t yet have any patients to generate revenues. Pro forma business plans often anticipate more revenue and lower costs than actually occur once the practice starts.  Don’t start a practice unless you’ve run best and worst case scenarios and have access to sufficient funds to cover the worst case.
  • Expansion.  Purchasing new equipment, moving to bigger quarters, adding personnel — all are expensive endeavors that take money out of the cash flow. Everybody can think of a small company that was doing great, expanded, and disappeared.   This is like another start-up and requires best/worst case planning.  Again, be sure you have access to sufficient funds to cover the worst case.  
  • Pricing.  This one’s importance  is manifest by the number of posts on the topic in Hearing Economics. If Cash is King, then Pricing is definitely its Queen.  Too low pricing yields high sales volume and low, maybe negative, profit.  Too-high pricing yields low, maybe no, sales volume and turns off  cash flow.   Either one left unattended spells death to the practice.  
  • Catastrophes.  Economic downturns, disease, death, fires, theft, terrorist attacks, war, floods, epidemics, embezzlement, employee revolts, employee walk-outs, partnership dissolution, divorce, poor investments, alien invasions … the list is extensive but all have a deleterious effect on cash flow.  
  • Payroll.  Too many non-revenue generating people on the payroll will eat up cash flow in a practice or even a country. Just ask Greece.  Even if you make the payroll, the following month brings is the problem of paying taxes withheld.  The IRS really dislikes it when your business misses a tax payment and they demonstrate their dislike with interest charges.  They slap on penalties if you make a habit of skipping payments.  More than one company I know has folded because it had enough money to pay everyone but not enough to pay the Government.
  • Overhead.  Besides payroll and taxes, other recurring expenses can get ahead of revenues.  Marketing endeavors, notably advertising, get expensive in a hurry if they don’t yield a good ROI, which is often hard to measure and therefore not measured.  Yet some practices try to solve that cash flow conundrum by throwing more money at advertising. This does not work. Neither does responding to volume discount promotions from manufacturers (often tied to advertising campaigns) by purchasing large amounts of stock.  Practices with more hearing aids on the shelf than they can sell in a reasonable period{{1}}[[1]]The ethical issues of stock purchases pose a different set of problems.[[1]] are dealing with inventory, which comes with an opportunity cost which adds to cash flow problems, which can snowball into economic shutdown. (see next section).  Another overhead expense that has become more common in recent years is funding employee education.  With AuD program costs skyrocketing, this is a looming cash flow issue for practices as well as employees and future employees.  We’ll be exploring this issue in depth in a separate and upcoming series.
  • Paying ahead. This is probably not a biggie most of the time, but it’s worth remembering that keeping cash in your accounts as long as possible is a good cash flow strategy. Pay your obligations on time, but not before or in advance.  
  • Customer discounts.  Discounts are a form of Pricing but deserve a separate bullet in the present discussion. It’s tempting to use discounts to bring in new customers but that approach comes with cash flow dangers (not to mention annoying return, loyal customers).  Discounts can take a sale into negative marginal profit land, which means reduced cash flow and survival issues, especially for young practices.  Value adds fall into this general category and tie to the ongoing and never-ending discussion of bundling.  Tossing too many services into the hearing aid price bundle can effectively discount services to the point that you’re losing money on every sale.  Cash flow suffers and the practices flounders.  
  • Payment plans.  I guess this can work if you charge enough to cover the costs of credit checks and managing receivables; also if you factor in the opportunity cost of delayed payment.  It is obvious that this strategy affects cash flow and raises the likelihood of cash flow problems, but a practice’s location and clientele may make it necessary.  Personally, I would move before I’d go this route, but that’s just me.

All of the above are important and common to every practice at one time or another.  Good management can handle most, although alien invasions are iffy.  The real weapons of cash flow destruction deserve their own post, scheduled for early May.  In the meantime, click on this link for a fantastic voyage through the hows and whys of doing cash flow analyses.

Photo courtesy of socio-economics history blog

  1. Cash flow is a lot like an illness—it’s hard to appreciate it without having been there. Furthermore, there are lots of indications that many in our field don’t really get it. For example, “I can’t afford a new piece of equipment (that would generate income), especially since I just bought a new car through the business.” I hope you discuss the bundled v. unbundled aspects of cash generation a bit too. Above all this, I hope this reaches the site.

  2. Mike,
    I agree with much of your analysis of AuDs “not really getting it”. However, I would part ways with the example of purchasing equipment. I’ve known of at least a couple cases of AuDs buying vestibular equipment and realizing that they aren’t generating enough revenue after their big purchases to maintain adequate cash flow and pay their bills whilst they pay for this new equipment purchase. Plus if you are simply replacing existing equipment, there’s not always going to be a real monetary advantage, aside from tax purposes (not a cash-on-hand advantage). At the end of the day, AuD programs need to offer some basic accounting/business courses so that more people in the profession can have at least a rudimentary understanding of how a business operates.

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