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As the U.S. Small Business Administration (SBA) states, the most common causes of business failure in any industry are inadequate leadership, poor cash flow, lack of appropriate marketing, and insufficient capital reserves.1
In other words, businesses often run out of money.
In the first installment of common cash flow pitfalls—8 common cash flow pitfalls to avoid: Part I— we identified the first four pitfalls OD practices may face, as well as strategies to avoid being in the dread cash flow pinch.
The first four pitfalls included:
1. Declining revenue
2. Cost of goods too high
3. Overcompensated staff
4. Occupancy costs too high
In this second and final installment, we explore the remaining four pitfalls OD practices want to dodge.
Also by Dr. Kling: Blog: How to caluclate your compensation as a practice owner
Pitfall 5. Poor spending controls
Just about every practice has some form of wasteful spending. Although ODs would like to think they run lean operations, the fact is that most have buried expenses they are unaware of.
Reducing our operating expenses requires hard work, discipline, and commitment to running a business more profitably. An OD can achieve this by taking a hard look at every penny he spends to run the business.
He will likely find surprises: unnecessary expenses, wasteful spending, or overpaying for things that could be renegotiated for a better price.
Start by making a list of all expenses from the last year. This information can be found on the business’s profit and loss (P&L) statement or from the practice’s accountant.
Place a P next to all expenses that directly result in a profit.
Place an R by the expenses that could be renegotiated for a better price or replaced by another vendor (with the goal of saving money). Contact the practice’s vendors and have an honest conversation about the need to get the best price possible—otherwise, an OD should be prepared to move his business to the competition, if needed.
Finally, place a U next to all expenses that are unnecessary to running a profitable business. Cut these expenses out immediately. An OD could find himself saving a couple hundred dollars a month ($1,000 to $2,000 per year) on things that are not necessary to running a business.
This exercise will take time, but ODs could discover hundreds—if not thousands—of dollars of savings each year simply by challenging every single expense in their businesses.