Dentistry Today Management Managing Cash Flow to Improve Your Bottom Line
Management

Managing Cash Flow to Improve Your Bottom Line

  • April 1, 2002
  • 7 minutes read
  • 23 years ago

Cash flow—how much money is flowing into and out of a dental practice—is an easy concept to understand. But not every practitioner is fully aware of the impact that cash flow has on the bottom line. That’s because the importance of cash flow is far easier to recognize in some professions than it is in others.

When a builder takes on hundreds of thousands of dollars in short-term debt in order to build some new homes, it’s obvious that he must generate positive cash flow in a big hurry if he is to survive. Although every case is not that dramatic, generating and managing cash flow is critically important in every dental practice, from the smallest to the largest. Losing control of money has caused more grief for more dentists than temporary red figures on the bottom line. On the other hand, a sensible cash management system can provide a life-sustaining cushion during the financial ups and downs that can be expected at one time or another in most practices.
Once you accept the importance of controlling cash flow, you’ll find it easier to stick to the rules of good cash management. Here are nine powerful techniques for improving cash flow in your practice. 

#1: NEVER ALLOW ANY OF YOUR MONEY TO LIE IDLE
If you don’t already have one, open a money market account at your bank and have it linked to your business checking account for telephone or online transfers. Deposit daily receipts into the money market account where they will immediately start drawing interest. 

Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash only as needed to cover checks written. 
“We already have a linked money market account,” says Abington, Pennsylvania dentist John Carabello, “but we haven’t been depositing all daily receipts into it. That sounds like a good idea.”

Trust me. It is a good idea. At the end of a year, the additional interest income it can generate is found money.

Worst sin of all: leaving daily receipts lying around in a desk drawer until you can get to the bank. Use every cent of your money to make money. That’s the mark of professional cash management. 

#2: DON’T BE TIMID ABOUT USING OTHER PEOPLE’S MONEY
We’ve all heard stories about professionals who have built large, successful practices without ever borrowing a cent, but they are clearly the exceptions. At today’s extraordinarily low interest rates, careful use of credit is one of the most effective practice-building tools.

Personally, I’ve never been comfortable with extensive use of credit for personal affairs. When it comes to business, though, it’s a different matter. To begin with, the costs of borrowing are legitimate tax deductions for professional practices. It makes more sense to spread out the cost of your capital purchases than to put stress on your cash flow by laying out large amounts of cash that could be used more profitably within your practice.

 

#3: CONSIDER LEASING
Leasing products like cars for personal use is not a good idea. Most accountants agree that leasing is the most expensive way to maintain a personal car. But business is a different animal entirely.

“The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment,” says CPA Thomas Normoyle. “It usually makes sense to lease if you will be able to use the cash in your practice or in your investments to earn a better return than the cost of leasing.”
Not everyone agrees, of course. “I’ve never leased any equipment,” says oral surgeon Dr. Robert Griffith. “When I started out, I bought an existing practice that came fully equipped. Since then, I’ve always felt that if I’m going to keep a piece of equipment over the long term, it was better to buy it outright.”
Still, most financial and tax advisors recommend that you consider leasing as one of your alternatives for capital purchases. Talk to your own tax advisor about this the next time you’re considering a large capital purchase.

#4: SPREAD THE GOSPEL
To manage cash, you’ve got to have a steady flow of the stuff coming in. As long as it’s in good taste, there’s no reason to be reluctant to market your services. As is the case with any business, marketing is a critical element to growth. As one medical professional told me recently, “If you don’t think you’re good, no one else will. You have to tell your story.” 

Of course, discretion has traditionally played a major role in marketing dental practices. Many dentists consider some of the conventional advertising media as inappropriate to their needs.
Dr. Griffith, whose practice depends heavily on referrals from other dentists, has found a system that works nicely for him. He distributes a newsletter titled Oral Surgery Update to the general practitioners in his area. The commercially prepared newsletter is customized with his name. “The local dentists appreciate the information it contains and it keeps my name in front of them,” he says.

Dr. Carabello, like thousands of other dentists, is experimenting with a website as a means of reaching potential new patients.

Whatever the method employed, more and more dentists are looking beyond referrals for ways to keep cash flow healthy. 

#5: DON’T BE IN A BIG HURRY TO PAY YOUR BILLS
There’s a good reason why checks are slow to come in from your accounts receivable: Hanging on to your cash as long as possible keeps that money available to draw interest or to work in your practice. Take the time to set up a system that provides for paying bills only when they are due. It’s easy to do and is another rung on the ladder of professional cash management. But don’t go overboard and jeopardize your credit standing by paying bills late. Pay your bills when they are due—not before, not after. And keep an eye on the state of postal deliveries during this uncertain time. If it appears that deliveries may be delayed, allow a little extra time to make sure your payment arrives in time to avoid those oppressive late-payment fees.

#6: BE AGGRESSIVE ABOUT COLLECTING ACCOUNTS RECEIVABLE
Never allow your billings to go untended. You’ve earned that money, you have a right to it, you need it. If your patients learn that you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.

If you’re not already taking credit cards, you could be missing one of the best cash- flow tools available. “I was very much opposed to credit cards 20 years ago,” says Dr. Carabello. “Now I can’t imagine being without them. They’re good for the patient and good for us. The patient gets the benefits of credit card use, and we eliminate collection problems.” 

#7. MAINTAIN A CASH CUSHION
Whenever possible, keep enough cash in interest-bearing business accounts to cover normal operating expenses for 3 to 6 months. There is nothing like the peace of mind and self-confidence that comes when you don’t have to sweat out next month’s office rent or payroll during a slow spell. And remember—your cushion money is making money for you in those interest-bearing accounts.

#8: DEVELOP A PERSONAL RELATIO
NSHIP WITH YOUR BANKER
Handling money is a banker’s job, and most are very good at it. Even if your practice is tiny, it’s a good idea to have a personal relationship at the bank where you do business. Discuss your financial picture with your banker. You’ll get some good ideas and a favorable ear should you ever need a little financial help.

#9: LET YOUR COMPUTER HELP YOU MANAGE YOUR CASH FLOW
Whether you use one of the commercial software packages such as DenPrax or Windent, or a PC with one of the popular financial programs such as Money or Quicken, learn to trust every aspect of your business affairs, including investments, to your computer. The financial reports and analyses that modern software can produce at the touch of a button can be vitally important tools for improving cash flow and bottom-line profits.

Even if your practice is large enough to farm out your record keeping, consider putting your office finances into one of the popular software packages designed for small business and personal finance. They are infinitely easier to use than they were as recently as a couple of years ago, and they will teach you in dramatic fashion how much you can benefit from a sensible system for managing cash flow. 

Mr. Lynott is a management consultant, author, and lecturer who writes on business and financial topics for a number of publications. His latest book, Money: How to Make the Most of What You’ve Got, is available through most bookstores. You can reach him at wlynott@cs.com or visit his website www.blynott.com.