Where did all the money go?
Most of our clients have been fairly flush with cash since Books & Benchmarks got started. We happened to launch right around the time COVID-19 relief funds were landing in practice bank accounts, giving many a temporary boost.
We typically recommend keeping one month of expected expenses in reserve, based on the previous six months of spending. While holding excess cash has its opportunity costs, the real strain comes from not having enough cash.
If your optometry practice is consistently low on cash, here are some common reasons and what you can do about them.
1. Low cash reserves
Sometimes, covering bills and payroll seems a little too exciting because there isn’t enough cushion in the checking account. We’re all for distributing cash to owners, but often, the simple solution to continual cash crunches is to build up your reserves. (Read our blog to learn more about cash management for optometry practices.)
2. Low profitability
If your cold start practice hasn’t grown into its overhead yet, or you struggle with profitability, cash flow will naturally be tight. Focus on growing your patient base and ensuring your fees and receivables are in line. Sometimes, you may even need to increase spending (on staff, space, etc.) to drive the next stage of growth.
3. Broken revenue cycle management
If your payroll and bills are high and you’re busy, there’s a chance that the issue isn’t filling the schedule and selling products. The problem is you’re not getting paid for the work you’re doing. Check your aging reports and audit some explanations of benefits to make sure claims are getting submitted and collections are coming in.
4. Poor investment choices
We’ve all laughed about a “shiny” new instrument that gets used so little it may as well be a paperweight. But whether you paid cash or, worse, financed it, underused equipment can seriously drain your cash flow.
Do some math before you invest: estimate revenue by multiplying the candidate patients and the revenue per patient. Then compare that number to the monthly payments or the amortized cost of the instrument (price divided over 5 to 7 years). And if you have a dud instrument, consider selling it or seeing if it can be returned.
5. Lack of tax planning
Another common shock to cash is an unexpectedly large tax bill. Even if you’re already paying taxes quarterly, consider putting cash into a separate tax reserve account every month. Review your estimated taxes with your CPA at least twice a year. And if you’re experiencing rapid growth in revenue or profitability, you may need a third tax check-in.
6. Too high salary & distributions
Sometimes, cash is tight because an owner is simply taking out more income than a practice produces. Or they take almost all the expected cash flow of the business in equal monthly portions, forgetting that the practice’s revenue, profits, and cash flow vary month-to-month. Keep your salary and draws at about half your expected income to leave room for taxes and monthly variations in the business.
Track your practice’s cash effectively
To see where cash is going in your practice, you’ll need to consistently keep your balance sheet up-to-date and accurate. If you’re not getting the financial reports you need, when you need them, and the support to fully understand them, let the Books & Benchmarks team handle your optometry practice accounting.
We’ll produce financial reports that help you make sense of your practice, ready for you or your CPA to review anytime. Contact our team today to learn how we can help you gain better control of your practice finances.
