Cash is King. Practices that fail to pledge fealty to Cash risk death or dismemberment by the villains that burn cash for fun. Bwahahaha! As promised in the previous post in this series, today wraps up the series with a rogue’s gallery of the biggest and baddest cash flow villains. Not surprisingly, all the big villains are internal weaknesses, not external threats.
And Now for The Big Ones
Accounts Receivable. Having a hefty Accounts Receivable sounds much better than having a lot of non-cash sales, right? Unfortunately, they’re the same thing. Not every transaction produces immediate revenue in a practice. This is especially true for Audiologists who are contractually committed to bill insurances in specific (and different) ways, then wait months for “adjusted” (another word for reduced) payments from primary insurers, wait again for tiny adjusted payments from secondary insurers, and finally balance bill the patient if the contract allows. If the contracts are run through an IPA (Independent Provider Association) the wait time is longer and the adjustments are larger. The costs of billing and reduced cash flow from non-cash sales can exceed the revenues eventually collected. Needless to say, Increases in non-cash sales can bring cash flow to a critical decline.
Accounts Payable. It’s not uncommon to pay expenses with credit in the form of bank loans, lines of credit, or credit cards. Paying on credit extends cash flow and may offer other advantages (e.g., business rewards credit card opportunities). This only works if there is sufficient future cash flow to pay off loans and credit cards without incurring high interest, carrying balances, or using up or losing the credit line. As with Accounts Receivables, the kiss of death comes with increasing levels of non-cash sales.
Vendor Credit. This is a special form of Accounts Payable that deserves its own section and probably should consume a full post. Most practices order hearing aids from manufacturers or other suppliers on credit. We don’t tend to think of this as a revolving line of credit, but the vendors definitely think of it that way. You may vaguely recall filling out “standard” paperwork for manufacturers when you started ordering hearing aids. Those were applications for lines of credit. Payment is due monthly and interest accrues on past-due balances.
If cash flow reductions keep the business from paying in full each month, the growing balance on account will eventually trip an invisible credit line set by the supplier, at which point credit is no longer available and the business must pay COD. This is an extreme form of reduced cash flow and often signals the practice’s demise or take-over by the supplier. And don’t look to your good friends, the Suppliers, to bail you out free of charge. With forward integration firmly entrenched and gaining ground globally, the Suppliers really could care less whether you pay your bills and run the practice or they pay your bills and take over your practice. Either way, their distribution channel stays open.
Poor Collection Methods. I’m guessing that every private practice over a year old has a binder of past-due invoices. I’ll guess that some of those invoices are old….very old. Finally, I’ll guess that the older the invoices, the less effort is made to collect. It’s depressing but true that the longer you delay trying to collect, the less likely you are to succeed. Such invoices even have their own name: Bad Debt. Bwahaha. If you’ve switched to a 3-inch binder, you are probably headed for trouble if not already in it.
Inconsistent Billing. Bad Debt is bad enough but what about practices that forget to bill? This happens. Remember the dog poop theory of cash flow ? Just because you’re excellent at what you do doesn’t mean you’ll stay in business. You have to bill and collect, which takes time away from what you are good at and like to do. Audiologists may be very good at Audiology but not good at business. Some would say that Audiologists are disinclined to excel at–or even demonstrate an understanding of–business. A generality, for sure, but it’s a cultural thing. It’s also a learning curve and nobody likes those. Remember the Anna Karenina Principle of Cash Flow? Audiologists who are really good at what they do will generate a lot of customers. The better they are, the busier they get, but if they’re too busy (or disinclined) to bill and collect consistently, their cash flow problem will grow faster than their business grows. They and their businesses will end up under the train — beautiful, tragic, gone.
Remedies are the usual suspects, and definitely not sexy: bank loans, cash advances, friends, family, yourself (credit cards, IRAs)…. yuck. If you thought the drudgery of billing and collections was bad, the remedies for not doing so are much worse. Not only can you bring down your business, but you can take your friends, family, and yourself with it.
The best remedy is to proactively hop on that learning curve. Basic accounting is a must, not only for producing invoices and tracking receivables, but to generate (and understand) P&Ls and cash flow analyses. Let me point you once again to this tutorial on cash flow analyses, which gives concrete examples of how to do it and why you need to do it. Free software is available with inexpensive upgrades for cash flow analyses of varying complexity and time frames. Intuit QuickBooks has a menu option for cash flow projections. QB Online has a Statement of Cash Flows report option, but no projected cash flow report option at present.
HearingEconomics is leaving this veil of tears to pursue happier topics, but don’t forget that famous saying “Happiness is a positive cash flow.” Really.
photo courtesy of derek m young