MedEsthetics magazines offers business education and in-depth coverage of the latest noninvasive cosmetic procedures for physicians and practice managers working in the medical aesthetics industry.
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BUSINESS CONSULT medestheticsmagazine.com | MARCH 2015 21 August is historically the practice's slow month in terms of revenue, a natural cash fl ow defi ciency may occur. With proper plan- ning, cash can be held back each month to prepare for more cash-lite months. One mistake physicians often make is bonusing out all of the cash to themselves. To build a cash reserve, start by not distributing all the cash to the owner(s). A prudent approach to physician bonuses is to take revenue minus expenses, less a cash reserve. The reserve needed will vary from practice to practice but, generally speaking, one month's expenses in reserves is safe. If employees are paid every other week (i.e., bi-weekly), a three-pay-period month can cripple the practice's cash fl ow for that month. This should be taken into account when preparing the budget. If possible, move to a semi- monthly payroll (twice per month) to even out cash fl ow. Semi-monthly payroll periods end on a specifi c day of the month (e.g., the 5 th and 20 th , or the 1 st and 15 th ). Not all states permit semi-monthly payroll, and managing overtime is more challenging with this schedule. Overtime is calculated based on one work week. Therefore, when a semi-monthly payroll ends before a work week ends, it will require a more complex calculation of overtime. As long as the practice has a mechanism to track overtime accurately, then a semi-monthly payroll is feasible. Excess inventory of skincare products can also create cash fl ow woes. Special deals, such as "Buy two and get one free," are attractive incentives that often lead practices to stock up—but if the inventory isn't moving, then the practice has sunk cash into products that aren't generating revenue. Practitioners might be offered a "smoking deal" on injectables if purchased in bulk, but the real question is, "Will I reasonably be able to use the injectables before their expiration date, and do I have the cash fl ow to purchase these large quantities at once?" How much inventory to purchase at once is dictated by how quickly the inventory will sell. In general, maintaining smaller amounts of inven- tory is wise. Shipping terms, including cost and delivery time, must also be factored into the decision of how much inventory to purchase. It is tempting to pay bills when the invoices arrive, how- ever, savvy cash fl ow managers will wait until an invoice is due before departing with cash. Practices can also take advantage of common payment terms—such as Net 20 and Net 30— that are often available or negotiable via vendors. The key is to align the practice's payment terms with its expected cash fl ow cycle—or how long it takes for payment to be received for services rendered. Days in accounts receivable is a com- mon metric used to align payment terms. Another strategy to conserve cash on hand is to use a corporate credit card to pay for expenses. The advantages are that the owner can make one monthly payment for practice expenses while accumulating points that can be used to fund staff outings, staff and physician travel, and other expenses. One aesthetic practice was able to fund a family vacation for the owners using points on the corpo- rate credit card. As always, consult an accountant regarding the tax implications of such transactions. Maintaining a line of credit is a practical solution to managing unexpected cash fl ow shortages. Establishing a line of credit when times are good is advisable since banks are more willing to lend when the practice can show strong fi nancial performance. If a practice opens a line of credit, payback—including principal and interest—must be included in the monthly budget, if it's needed. Managing cash fl ow is achievable with proper planning that includes savings and backup strategies for unexpected shortages. Practices that take the time to create a cash fl ow plan will benefi t from less stress and better fi nancing options. Cheyenne Brinson, MBA, CPA, is a practice management consultant and speaker with KarenZupko & Associates, Inc., a medical practice consultancy based in Chicago. Creating a monthly budget allows practices to prepare for slow sales months. If employees are paid every other week, a three-pay-period month can cripple the practice's cash fl ow. © GETTY IMAGES