What would you say is the key to a practice’s success?
Location? A full patient database? Certain services and treatments? The right staff?
While all of those factors are important, profitability is the ultimate mark of success. No matter how busy you are with patients, if cash is coming in too slowly compared with your outflows, then there can be a problem big enough to potentially put you out of business.
As any business owner knows, you need to invest money to make money. Not everyone has extra funds at their disposal, and they often turn to lenders to improve their business.
Many dentists who apply for a loan need guidance in estimating their practice cashflow to determine just how much they need to borrow. This is a requirement for many loan applications and can be the most difficult part of the process, particularly for new owners.
Know Your Buckets
To get a handle on your practice’s cashflow, you have to know where the money comes from and where it goes. The most common practice expenses include:
- Insurance reimbursements
- Payroll
- Equipment
- Supplies
- Real estate and utilities
- Emergency fund
Now let’s examine two potential scenarios to illustrate how to estimate cashflow and the amount needed to borrow.
Example 1: Buying New Equipment
A dentist wants to purchase a 3-D scanner. For easy numbers, let’s say the unit costs $100,000 and the payment structure is $3,000 each month. Take note that $100,000 is just the baseline cost. This implies that borrowing just $100,000 is going to leave you strapped for cash. That is why you should also factor in the monthly interest. If the rate is 10.99%, you can estimate an additional $11,000. Then consider any peripheral costs, such as training staff to use the new equipment. If a training course costs $500 and you want to train four employees, that’s an additional $2,000.
Once you have a more accurate idea of the costs, take a look at the return on investment. How many monthly scans will it take before you have covered your costs and start earning a profit? Do you have the patient base to generate the volume needed to cover costs? Also, you need to know your reimbursement cycle so you can estimate how long it will take to receive payment for each scan.
Example 2: Adding a New Associate
Over the past six months, the practice has been extremely busy and the staff is working at capacity. The owner decides to hire a new associate and offer a $100,000 salary, which works out to be just over $8,000 gross per month. If the employee opts in for healthcare benefits, there will be additional costs.
Just as with a new piece of equipment, consider how long it will be before you start earning income with this additional staff person. This will help you determine the amount you need to borrow. The industry standard is to have enough money to cover six months of salary and benefits.
Having the working capital available will help you avoid tapping into other lines of credit and/or income, and it can give you peace of mind. If the employee starts generating income earlier than anticipated, you can typically make extra or early payments on your loan, therefore saving interest.
Know What You’re Dealing With
If you feel too removed from the operations side of your practice to understand the regular billing and income cycles, then it would serve you well to spend time with your office manager, human resources manager, or CPA. To get a complete picture of patient flow and reimbursements, look back at least 12 months.
Why is it so important to look back at the past year? Because it can help you identify your fixed costs (real estate, payroll, insurance, etc), analyze the variable costs, and understand the peaks and valleys of your business.
For example, your office may be busiest in December, as patients try to use benefits that will expire by the year’s end. To accommodate that period, you may need to hire someone or extend hours, which indicates extra costs you’ll need to cover in that timeframe.
If you wouldn’t blindly let someone else manage your personal finances, then why would you blindly let someone manage your business finances? You should always know the state of your business finances and have a plan if something happens to the person you employ to manage them. Don’t forget that personal finances are often tied to an individual’s business investments, so practice due diligence and be aware.
As a sole practitioner, you need to be informed, and finances are the most important thing about which you should be informed. Once a month, meet with the person who manages your finances. After all, if you’re paying someone to do a service, you may as well get the most bang for your buck and understand what’s being done for you.
Ms. Brissette is chief credit officer at Bankers Healthcare Group, the leading provider of financial solutions to healthcare professionals. She holds an AS in accounting from Onondaga Community College and a BS in finance from Columbia College. To reach her directly, send an email to aprilb@bhg-inc.com. For more perspectives on medical and dental practice financing, visit the BHG blog.
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