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Do You Have Enough Cash in Your Healthcare Practice to Grow?

Owners of healthcare practices often wrestle with a difficult question: “Is there sufficient cash in my practice to capitalize on my next growth event?”

It’s important for business owners to strike a balance between taking profits and leaving enough capital within the business to ensure its stability, growth, and resilience in the face of challenges. But this balance can be difficult to determine.

Although we always recommend you consult with your accountant, lawyer, and other advisors to create a solid financial plan about working capital/cash flow management, this article offers some initial information that will help you get started.

Definitions

Before we get to the heart of the matter, let’s go over a few concepts that are helpful to understand.

  • Balance Sheet: a financial statement that breaks down a company’s assets, liabilities, and shareholder equity at a single point in time. It can be used to evaluate a practice’s working capital and the amount of its capitalization that’s debt versus equity.
  • Working Capital: this is the difference between current assets and current liabilities. Current assets are your highest liquidity assets and typically include cash, accounts receivable, and inventory. Curent liabilities typically include accounts payable, pay roll, and accrued expenses.
  • Working Capital Ratio: shows how much working capital is available for every dollar of current liability.  A strong ratio would be in the 1.7-2.0 range.
  • Cash Flow Statement: measures how much money the practice generates or consumes in a given period. It provides information about a practice’s ability or inability to generate profit.
  • Profit and Loss Statement: summarizes the sales (revenue), cost of goods sold (labor) and expenses related to operating a practice during a specific period in time (monthly, quarterly, or annually.)

Why Does Capital Matter?

  • Effective working capital management is crucial for the financial health and success of a healthcare practice.
  • Withdrawing excessive cash from your business as a shareholder can have significant disadvantages. (Keep in mind that the specific implications will depend on your business structure, financial situation, and the prevailing laws and regulations in your jurisdiction.)

Here are 6 ways withdrawing too much cash can put your business at a disadvantage:

  1. Impact on Business Valuation: If you’re considering selling your practice in the future, potential buyers will assess its financial health, including cash reserves. Pulling out excess cash can lower your business’s perceived value and make it less attractive to potential buyers. Strong financial performance is one of the most critical factors that potential buyers consider when valuing a business. Clinic owners should focus on the diversifyingrevenue, achieving steady growth, improving profitability through efficient and streamlined operations, creating a steady and stable workforce, and demonstrating a commitment to quality care and patient outcomes. These can be achieved through investment strategies such as expanding services, increasing patient volume, optimizing pricing, controlling overhead costs, and having a steady brand image in the community.
  2. Reduced Reinvestment: Withdrawing cash reduces the amount of capital available for the business. Retaining capital within the business can contribute to stability, growth, and resilience over time. Investing back into the business can lead to greater profits in the future by being able to seize timely opportunities, hire top talent, purchase assets at a discount, adapt quickly to changing market dynamics, and remain resilient despite economic downturns or unexpected events.
  3. Business Growth: Having ample capital can give the business a competitive edge. The cash that remains within the business can be reinvested to fuel growth, such as launching new products, expanding into new markets, increasing marketing efforts, hiring top talent, investing in new technology, improving products or services, acquiring a competitor, and staying competitive.
  4. Tax Implications: Depending on your jurisdiction and business structure, withdrawing cash could result in additional taxes. These withdrawals are ultimately taxed at higher personal income tax rates than corporate tax rates. It’s important to understand the tax implications of any cash withdrawal (income splitting, etc.)
  5. Working Capital Impact: Working capital is the amount of money available to cover day-to-day operational expenses. Regular cash withdrawals could potentially strain the business’s working capital, making it challenging to cover day-to-day operating expenses or unexpected financial needs. As a risk mitigation strategy, having a financial cushion to manage unexpected challenges such as economic recessions, supply chain disruptions, or emergencies can prevent the need for drastic cost-cutting measures or taking on high-interest debt during tough times, without interrupting your business operations.
  6. Liquidity Issues: If the business does not have sufficient cash reserves and substantial withdrawals have been made, the business could face liquidity problems. This might make it difficult to cover immediate financial obligations and reduce any borrowing capacity.

How to Improve Your Healthcare Practice’s Working Capital

If you’ve decided that you want to increase your working capital, there are many ways to go about doing so. Here are some examples of strategies that small businesses can implement to improve their working capital management:

  • Streamline Operations: Identify and eliminate inefficiencies in business operations to reduce costs and free up cash. This could involve automating certain processes or renegotiating contracts for better terms.
  • Control Costs: Implement cost-cutting measures to control expenses without compromising on the quality of products or services.
  • Forecast Cash Flow: Create accurate cash flow forecasts to anticipate future cash inflows and outflows. This helps in identifying periods of potential cash shortages or surpluses, allowing the business to plan accordingly.
  • Manage Inventory: Optimize inventory levels by implementing just-in-time (JIT) inventory practices. This reduces carrying costs and prevents overstocking or stockouts.
  • Manage Accounts Receivable: Set clear credit terms for customers and establish a systematic process for collecting payments. Consider offering discounts for early payments to encourage quicker settlement.
  • Manage Accounts Payable: Negotiate favorable payment terms with suppliers without damaging relationships. Take advantage of vendor discounts for early payment if feasible.
  • Supplier Relationships: Nurture positive relationships with suppliers to negotiate favorable terms, such as extended payment deadlines or discounts for bulk purchases.
  • Diversification: Consider diversifying your product or service offerings to reduce dependence on a single revenue stream, which can help stabilize cash flows.
  • Debt Management: If the business has existing debt, manage it effectively by making consistent payments and exploring opportunities to refinance at lower interest rates.
  • Strategic Pricing: Set prices strategically to ensure profitability while remaining competitive in the market.

At the end of the day, your job as a practice owner is to create transferable value.

If you want to create a business you can sell for the highest price, you should focus on creating business equity by building a practice that creates value beyond its balance sheet. In other words, building a practice that can be transferred to a new owner. 

If you can’t sell your company today with the confidence that a strategic/financial buyer can operate it as profitably as you, then you still have work to do in building the right kind of value and equity in your practice.

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