Anticipation key to dealing with cash-flow shortfalls

A column about keeping your practice in good health

By Mike Norbutcovered practice management issues during 2002-06. Posted Aug. 22, 2005.

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With revenue and expenses not always coming in evenly and consistently, even the healthiest, most successful physician practices can find themselves in a cash pinch on occasion.

There are strategies that practices can employ, however, to get them through times when cash flow is a little lean. From lines of credit to cost control, physicians should be aware of the ways to cover uncertain contingencies as they arise. It could mean the difference between taking home a paycheck that month -- or not.

"Everyone gets used to what they get paid," said Tom Cottrell, a partner with the Fort Wayne, Ind., office of BKD LLP, an accounting and financial advisory firm. "They don't consider the struggles a practice may have."

An insurer might delay payment on claims for some reason. A physician might decide to retire, or medical liability premiums might double from one year to the next. The office manager might leave, or someone working in the billing department might need to go on disability. The possibilities for unusual events that can throw off the rhythm of a practice are practically endless.

These events are more likely to disturb smaller, fledgling practices, but because many of them occur without warning, any practice could find itself short on cash at some point.

"The best of groups can have this happen to them," Cottrell said.

Many groups keep a line of credit open with a local bank to handle short-term cash crunches, and they work quickly to pay off debt so they don't lose too much money to interest.

Sometimes, however, having a line of credit isn't worth the aggravation of dealing with the bank regularly. Arash Tirandaz, MD, an internist in Plano, Texas, said his four-physician group grew tired of having to fill out the same paperwork every six months to retain its line of credit. Instead, the group has a business credit card, which it uses to pay its debts when cash is a little tight.

"We asked for multiple limit increases, so now our credit limit is $100,000," said Dr. Tirandaz, the CEO of the group, Plano Internal Medicine. "As such, it does the same thing as a line of credit. But we get a 20-day grace period to pay it back withoutinterest."

But using a line of credit or a credit card can propel you down a slippery financial slope if you're not disciplined enough to address the expenses immediately. Debt can pile up, turning an intermittent cash-flow problem into a perpetual income issue.

Cottrell described one practice that racked up more than $250,000 in debt because doctors were using the group's line of credit to pay themselves and to cover other expenses. They were spending the money without a plan to pay it back, he said.

Physicians who use something other than cash to cover their shortfalls shouldn't get into the habit of tapping that source unless it's under extraordinary circumstances, consultants said. Even in those situations, physicians can employ other short-term cost-control strategies that will help address cash flow from the expense side, they said.

While many overhead costs are fixed, some expenses, such as overtime for staff, are variable costs that you can reduce immediately, consultants said. You also can start preparing for when your big bills, such as your liability insurance premiums, arrive, they said.

Physicians also need to couple those short-term contingency plans with a long-term strategy that will minimize the impact of cash shortages when they occur, consultants said. That long-term strategy is centered on building reserves and tracking cash flow closely to recognize the ebb and flow of the group's bank account, they said.

Robert James Cimasi, president of St. Louis-based Health Capital Consultants LLC, said he stresses the need for practices to retain some of their earnings in a way that will provide immediate liquidity should the need for cash arise quickly.

"It's like poker. You can have a winning hand, but if you run out of chips, you're out of the game," Cimasi said.

Some physicians will decide not to pay themselves, or at least not draw on the group's profits, to help build cash reserves if they are getting low, although these are usually last-resort measures. Going without a paycheck or two often motivates doctors to place greater emphasis on their cash flow, which enables them to better anticipate when the major expenses are coming.

"The best thing is being able to look forward to know when those outflows will happen," Cottrell said. "People talk in terms of one month's worth of payroll or one month's worth of accounts receivable in reserve. It's difficult to have more than that, because a month goes by pretty fast."

Mike Norbut covered practice management issues during 2002-06.

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