3 Ways to Boost Private Practice Cash Flow

3 Ways to Boost Private Practice Cash Flow

Cash flow got you stressing? Let’s talk about 3 ways you can boost your private practice cash flow and start to get some more predictability in your cash situation.

Cash flow is often one of the most difficult parts of private practice finance to get a hold on. By following these 3 steps, you’ll start the journey of controlling your cash flow, instead of letting it control your decision making.

The transcript of this video is below:

Private Practice Cash Flow Introduction

Hey, it’s Nate from Navigator Bookkeeping, and I’m here today to talk to you about cash flow. Now, cash flow is mysterious for a lot of practice owners because we hear a lot about it, but what really is it? Just to give you the most simple definition, cash flow is basically saying from the start of one period to the end of one period, how did your cash change? So if we’re talking about a month, from January 1st to January 31st, how did your cash change? Did it go up? Did it go down? And by how much? That’s cash flow. You can look at it by month, by year, but usually we’re looking at it by month, and we’re doing our review meetings with clients.

So what we’re gonna talk about is how can you boost your private practice cash flow. Because if you’re a private practice owner, you know that cash flow is one of those most difficult tasks to really get on top of. Profitability, you can manage that, building up a little bit of savings, you can manage that, but cash flow, getting consistent cash flow every month, that is next level. That is very tricky.

#1 – Track Private Practice Cash Flow

So let’s talk about three things you can do to boost your cash flow in your business and take care of that. Number one, this is certain basic, but you gotta track it. You gotta know what’s happening as far as cash flow goes. Really, that comes down to pulling a QuickBooks report every month. There’s a report called the statement of cash flows. Pull that monthly and see what’s happening. Now, that’s gonna show you a couple of things, it’s gonna show your profitability for the month, which is kind of your starting point. So if you’re negative from the start, you’re already gonna have negative cash flow.

So if you see that, first thing is actually to go back to your income statement or your profit and loss, same statement, different names, and check out why you’re not profitable. And it maybe was a three pay period month and there was a little bit of a fluke, and that’s fine. But if every month you’re not profitable, very tightly bringing in a very small amount of margin, then that’s actually a starting point. But let’s just say they have positive profit, so positive profit is gonna be at the top of that statement, and then as you go down, you’re gonna see any loan or credit card payments, and then you’re gonna see the owner’s section, which is gonna show any draws that you took out of the business.

So the first thing you gotta do is just start looking at the statement monthly. I would go a step further and start writing down in a spreadsheet, just very simple, what your cash flow is every month. Okay, so January, plus $4000, February, plus $2500, March, minus $1300, and start just tracking that, maybe even put next to it a reason for why that happened. April, maybe you were minus $4000, but you paid your taxes or you paid your estimated taxes. Those estimated tax months are almost always gonna be a negative cash flow month, ’cause you’re paying a full quarter of taxes. If you’re paying your year-end taxes, that’s gonna be a lot of cash leaving.

That’s fine. If you have one or two months of negative cash flow here and there, not a big deal, but it’s good to track it, write down what’s happening, and then you can start to see some of those trends that are happening in the business, “Why did I have a negative cash? Why did I have positive cash?” If you’re not doing this first step, the other two steps are not gonna be super helpful ’cause you’re not gonna know the real cash flow situation in the business. So that’s number one. Just track it.

#2 – Control Owner’s Draws

Second step, control owner’s draws. These draws, distributions, similar terms. This is you taking money out of the business as the owner, not through salary. If we’re talking about paying yourself through payroll, paying yourself a salary or an hourly wage, that’s different. That’s not what I’m talking about. I’m talking about distributions or draws, which is you just transferring money out of the account to yourself or writing yourself a check.

Now, almost all owners do this depending on business entity type, and this is a good thing, it’s not a bad thing, but what we see with a lot of practice owners is that they’re taking out too much money in draws. Basically, they’re trying to pay themselves at an unsustainable rate. So let me give you an example. If you have $5000 in profit in a month in your business, in your practice and you draw out $4500, you’re only leaving $500 in the practice to build checking, to build savings, things like that. That’s already gonna make your cash flow really tight. Now, we actually often will see practice owners even go a step further and actually pull out more money than the practice is keeping, so they have $5000 hours in profit, they’ll draw out $6000. You’re getting minus $1000 on a cash flow already. That’s not even taken into effect loan payments, credit card payments, anything like that.

So you need to be really careful about your distributions and draws. I usually recommend pay yourself a set flat distribution per month. Maybe even wanna do it quarterly, but if you wanna do it monthly, just to supplement your pay, just do it monthly and stay at that rate. And if the business does great and there’s really positive cash, then you can bump that up. But when you’re doing a fluctuating draw, “This month, I took $5000, last month, I took $2000, the next month, I had an emergency at home, so I took $12,000,” that’s killing your cash flow and the business, and it’s really hard to project what’s gonna happen. So take a flat amount, talk with your bookkeeper, your accountant or whoever does your books and try to figure out what that flat amount is and stick to that.

Then you can check in every three months or every quarter or every four months, doesn’t matter, and say, “Okay, we’ve been taking $3000 a month. Does that work, or do I need to up or down that amount of distribution?” But distributions are your probably easiest lever to pull as a business owner to know, “How can I affect cash flow?” If I’m bringing in $5000 a month, I’m not gonna be taking $5000 in draws, ’cause I’m leaving no money then in the business. So you got to be really careful about this.

And this is the number one reason that we see that business owners, practice owners are struggling with cash flow, is the distributions. So number one, track it, number two, watch your distributions and stick to a scheduled plan with those and keep reassessing that.

#3 – Build Savings in Your Private Practice

And then, the third one is, you got to build some savings. Now, private practices are notorious for having up and down months. You have a clinician that comes on, maybe they also have a lot of capacity, revenue bumps up within that clinician, goes on vacation or is sick or leaves, all of sudden your revenue drops down. So it’s normal for private practices, especially group practices, to have big swings in revenue month over month, and that’s normal, and that’s fine. But if you’re not prepared for that, cash flow is gonna be really tough, ’cause one month, you have $10,000 in profit, the next month, you’re minus $5000 in profit. What do you do? What you have to do is build some savings.

Types of Private Practice Savings

Now, there’s two different types of savings I’ll talk about. Both are important and both are key to do in the practice. Number one, tax savings. What this is gonna do is this is going to be you setting money aside for estimated tax payments, which you pay each quarter and for your year-end tax payments. If you don’t do this, what’s gonna happen is when those estimated tax payments come up or the year-end tax payment comes up in April or if you have an extension later in the year, all of a sudden you have to find potentially tens of thousands of dollars in the business that you weren’t really planning on. So a tax savings account basically allows you to save month after month after month and build up that savings so that when those estimated tax payments come up and when those year-end tax payments come up, you can cover those from your separate tax savings account. So that really helps with cash flow, helps you plan for that. Really, what you’re doing is you’re living off less. You’re taking money out of your operating checking account every month and setting it aside so that you know in your head, “This is not my money. I’m gonna have to pay this to the government at some point.” So that’s the first thing you can do.

The second one is emergency savings. This is really gonna be your float for cash flow. Basically, what you wanna do with the emergency savings is build that up month over month. You don’t have to put a huge amount in every month, if there’s not much cash in the business, you can start slow and kind of accelerate this, but you wanna eventually get to the point where you’re putting in a couple of percentage points of revenue, maybe 1%-3% of revenue, in this every month. It depends on the business, but that’s just maybe a starting point to start thinking about. And what you’re gonna do is you’re gonna slowly contribute to this and build it up like a snowball until you have a large savings account that can cover a couple of months of your expenses. And what’s gonna happen then is when you have something happen like a clinician leave, maybe you even have a couple of clinicians leave at the same time, you have savings you can pull on to kind of float your cash flow. So you might be minus $10,000 in cash flow for a month, but hey, your savings has $60,000 in it. You can pull from that, and it gives you time to hire somebody else to make decisions and avoid panic decisions, which is the whole key.

So that emergency savings is really key in cash flow. If you can build it up, get, let’s say, at least a minimum of three months of expenses in there, operating expenses, I would love even maybe six months of expenses in there at some point, depending on how many clinicians you have, what that situation looks like, that’s gonna allow you to float yourself if cash flow gets tight.

So those are the three things to start thinking about with cash flow. You got to track it so you know what’s happening, what your story is, you need to do check owner’s draws and make sure you are doing those in a sustainable manner, in a structured matter, you’re not taking too much out of the business, and you got to build up some savings for yourself. If you do those three things, you’re gonna start having a much better idea about what’s happening in the business’s cash flow, and you’re gonna be able to build yourself a little bit of float, a little bit of flexibility so that when things happen, good or bad, you have time to make decisions and know what to do. Like I said, at the beginning, if you don’t have a positive profit, that’s really the first thing you’re gonna diagnose before you even get to cash flow, but many practices we see have positive profit, but negative cash. This is where this kicks in. You can start thinking, “All right, how do we get back to positive cash and start building up that cash in our private practice?”

If you have any questions about this, leave a comment below the video. I’m usually pretty quick to respond, so I’d love to respond to you, and we can talk more about this. Other than that, be on the lookout for more of our videos, and we’ll talk soon.