Lower your financial risk

April 17, 2014

This is a critical time for private practitioners. There is more competition from commercial retail chains, lower reimbursements from managed vision care (MVC) plans, confusion still lingers regarding the Affordable Care Act, and the economy is not back to pre-recession levels. The average OD chose the profession for the clinical aspects and to help patients, not to be a CEO.

This is a critical time for private practitioners. There is more competition from commercial retail chains, lower reimbursements from managed vision care (MVC) plans, confusion still lingers regarding the Affordable Care Act, and the economy is not back to pre-recession levels. The average OD chose the profession for the clinical aspects and to help patients, not to be a CEO.

But the landscape of optometry has changed, and will change as health care continues to be dynamic, and state and national associations continue to push the legislative agenda. During this 4-part series, I hope to better inform optometrists on how to lower their financial risks during these fluctuating times and to think like a CEO and business owner.

In this competitive environment, it is critical to think about all aspects of your business and not just rely upon office managers, accountants, and financial advisors. The more informed you are, the better decisions you and your team can make for your practice’s financial success.

Cash flow management

Do you know how much cash your practice has in reserves? How much cash do you need to operate every month? And when is cash needed? This is referred to cash flow, and cash flow management is the most important aspect of any business or practice.

Understanding how your monthly cash flow is derived is extremely important, and it is more than just money in and money out. Without the right balance and planning, paying your suppliers and employees can be difficult, and you may have to make changes that can be counter productive and ultimately cause the practice to close.

The first thing to understand is that cash flow and profit are not the same. When closing your accounting at the end of the year, your practice can be profitable but still have months or periods in which there was negative cash flow (more money going out than in).

There can be a variety of reasons: seasonality of the industry, delays in payments from patients and insurance companies, quarterly and annual expenses due in full, etc. Analyze the components of the inflows and outflows of your practice to find the problem areas.

The goal is keeping the inflows flowing and delaying outflows as long as possible.

For example, when selling glasses or contact lenses, collect the payment in full, or as much as possible, instead of allowing the patient to put down the least as possible. This will keep the inflows ahead.

Now, think about how you purchase inventory of frames, contact lenses, and supplies. Ordering on credit, opportunity to receive the goods before payment is due, can decrease your outflow. Selling the inventory before payment is due is extremely advantageous but also extremely hard.

This allows the practice to collect revenues before the expenses go out, therefore increasing the inflow of cash and decreasing the outflow. Large manufacturers and retail optometry constantly monitor this type of activity and strive to find the perfect balance of ordering just enough inventory.

This is referred to as just-in-time inventory, or JIT. Not only can JIT inventory increase your cash flow, it can reduce many overhead expenses associated with over ordering fames, lenses, and supplies, such as the costs of storing. It also creates efficiencies that lead to less waste of unsold inventory and better supply-chain management, which allows for more consistent and efficient delivery to your patients.

 

Increasing the inflow

Other opportunities of increasing the inflow is monitoring accounts receivables from MVC and insurance plans, patients, and credit card vendors. The faster you collect your receivables, the faster you can pay your vendors, employees, and overhead expenses.

Collection delinquencies for your receivables are difficult to predict but can be managed with several methods. Running credit checks on patients can be time consuming and not necessarily the image you want your practice to portray, therefore it maybe more advantageous to create a monitoring process that tracks aging receivables.

Traditionally, account receivable monitoring has been part of job descriptions of office managers, bookkeepers, and/or accountants, but not all practices employ separate individuals to handle this. Additionally, job descriptions are consolidated with smaller practices to reduce the overall administrative costs.

Thankfully, a lot accounting and practice management software have these features that let you know when receivables are past due. Monitoring allows you to take action more quickly to payment behavior and re-evaluate the processes of collection to reduce delinquent or non-payments.

Some other examples of expediting receivables are to keep invoices simple and paperless, as well of allowing receivables to be electronically deposited. The easier and more efficient you allow receivables to be made, the inflow your practice will have.

Preparing for the rainy days

Not all business activities can be predicted, such as inclement weather causing your practice to shut down for several days. During this period, your practice is not incurring any inflow of cash but does have outflow of expenses. Having financial cash reserves is extremely important for both start-ups and matures practices.

Building this “rainy day” fund is essential, but it can be extremely difficult. First, develop a cash-flow budget in which 5% of profits are set aside to grow your reserves.

Typically, a 6-month reserve of the average cash outflow is ideal. Secondly, it is equally important to replenish any funds withdrawn from this fund as your practice has positive cash flow.

In a perfect world, sales would always be cash, and payments would be prompt. Expenses would never fluctuate and would be equally as timely. Unfortunately, the timing rarely occurs together, and this causes a cash-flow gap to occur.

With better management of inflows and outflows of your practice, the cash-flow gap becomes smaller. As retail and corporate entities expand in more markets, clinicians are forced to operate their practices just as efficiently and become just as productive. Cash flow management is a key to lower your financial risk and managing your practice better.ODT

Part 2: Hire and mange key employees

Part 3: Managing risk avoidance