I have seen a few cases lately where Books & Benchmarks clients tried to handle tight cash flow by using multiple checking accounts to budget for expenses. But does this strategy actually work? This week, let’s discuss some causes of tight cash flow, the challenges of forecasting cash flow in an eyecare practice, and the on-the-ground reality of planning through checking accounts.
It’s important to note that cash can be tight in two ways. First, the practice might not have much cash in its checking account(s), making upcoming expenses a constant source of concern and stress. Second, a practice might have tight cash flow when the cash generated from patients’ payments and insurance collections is less than a practice’s bills and/or loan payments.
Why is cash tight?
Cash on hand or cash flow can be tight or negative for several reasons:
- Expenses exceed the revenue (or collections) coming into the practice, especially in cold-start practices. This is when revenue growth is essential, though tightening up A/R processes will also help.
- Principal payments on excessive debt eat into free cash flow. Before buying equipment, make sure the money you expect to make from it is more than the amortized (spread out over time) cost to own that instrument.
- Large but infrequent expenses—like tax payments or annual 401k contributions—can drain even healthy cash reserves if you’re not prepared. Often, newer owners get a “surprisingly” large tax bill in year two or year three because they’ve both increased profits and run out of start-up costs to expense or depreciate.
- Sometimes, it feels like money is tight because a practice doesn’t keep enough cash in its operating account to handle the regularly recurring expenses. As your practice grows, your checking account balance needs to increase to cover your growing payroll and bills.
Interestingly, several of our clients who are using a multiple budget account strategy to manage cash flow are quite profitable and enjoy healthy cash flow. They fall into category four above; having a larger operating reserve would make things much easier for them. With one large account, they could cover their (large) bills without the complexity of moving money around multiple accounts.
The challenge of forecasting cash
The appeal of putting money into a separate account to ensure you’ll have enough to pay given bills (like payroll) makes sense to me. After all, you know what your upcoming bills will be.
What’s harder to forecast is revenue because incoming revenue depends on several factors:
- How many patients show up in your office.
- How much those patients spend on exam fees, special testing, eyewear, contacts, and other services.
- How much third-party payers pay versus what your U&C charges are.
- How quickly you get paid after seeing a patient.
Planning for bills would be simpler if your practice knew how much revenue would come in and when. For now, this is incredibly difficult, bordering on impossible.
A tale of a budget account
The challenge of using budget accounts where a practice needs a bigger reserve is that every time money is moved to one “expense account” to ensure sufficient funds, it can leave another account short on cash for its bills.
Consider one of our clients who has set up seven separate accounts to budget for expenses. 1) an account receives revenue, which is transferred to accounts that pay for 2) loan obligations; 3) owner compensation; 4) profit; 5) taxes; 6) operations; and 7) equipment.
Part of the philosophy of this approach is to prevent businesses from spending money recklessly. However, from looking at financial statements for well over 1,000 practices, I assure you that overspending is not a common issue in independent optometry.
As an example, let’s consider the equipment purchases account from this practice. It’s a good idea to save for predictably large expenses, so long as you sort out your ordinary operating expenses first. In this case, the owner started putting $1,000 a week into this account in January.
- Pro Tip: if you make weekly transfers, especially between more than two accounts, you should revisit your overall cash reserves, profitability, and cash flow. You’re spending valuable time thinking about how and where to move your money that is better spent working on growing your patient base and revenues. Anything being transferred weekly could (and should) be transferred monthly.
These transfers continued until April when the account was emptied to bolster the operating account. And here lies the issue: money from five out of the seven accounts ends up in the same place anyway, no matter what account it comes from.
Do not confuse activity with accomplishment
Here’s the thing about these strategies: there’s a lot of effort and activity involved, but I have yet to see evidence that they lower spending. Even worse, each additional account is one more opportunity to overdraw because not enough money was transferred in.
A single operating account that takes in revenue and pays out all the ordinary expenses is much better at handling fluctuations in your total bills than having multiple individual accounts.
From a bookkeeper’s perspective (it’s what we do), every banking account that must be reconciled and accounted for greatly increases our workload and the likelihood of errors in your financial statements.
Let us simplify your practice’s financial operations
If you truly want to get a handle on your cash flow, let Books & Benchmarks:
- Clarify your P&L so you understand your overhead and profitability,
- Tighten up your balance sheet, so you can truly see where your cash goes, and
- Provide month-to-month guidance on appropriate cash reserves and your practice’s overall cash position.
Are you struggling with cash flow? Schedule a call with Books & Benchmarks to learn how to simplify your financial operations and ensure your practice’s stability.
