Why is the practice profitable but I don’t have enough money to take home?
Why can’t I seem to pay down the practice debt as fast as I want to?
Why are we busy but we’re still having trouble paying bills?
These are just a few cash flow questions that dentists ask themselves on a regular basis.
Here are the top six actions that any dentist can take to improve cash flow in the practice:
- Think like a CEO, not a CPA. The CPA, or certified public accountant, wants to get net profit as low as possible to minimize tax exposure. Put yourself, as practice owner, in the seat of CEO. The CEO wants net profit higher so cash flow is strong. The CEO regularly asks, “How is the practice performing?” The CEO regularly examines how to decrease expenses and increase profits. A CEO needs to be proactive in looking at the financials, and find a balance between cash flow strategies and tax strategies.
- Stay on Top of Debt Servicing. Just to open the doors, a dental practice may take on $500,000 in debt (or more). That may add up to thousands of dollars a month payback that is not being reported on the Profit and Loss. Many practices are under the false impression that 15 to 20% profit margin is sufficient. In fact, net profit may needs to be closer to 30 to 50%. It’s important to understand how to read the profit and loss and the balance sheet. These financial reports will help to explain why you can be making a profit but having trouble paying bills or paying yourself on a regular basis.
- Follow the Money. Oftentimes the dental software shows collections, but that doesn’t translate to the accounting software. In order to have a clear picture of how much money is coming into the practice, connect the dots to the revenue in your accounting system. Beyond that, always have clarity on what is outstanding for 60 days and 90 days. Have a good accounts receivable process. Money coming into the practice needs to come in as quickly as possible on a regular basis.
- Leave home at home. Resist the temptation to pay bills as you do at home. That approach does not serve the practice well. Business vendors will often offer payment terms, allowing a practice to pay over time. For strong cash flow, hold onto your money for as long as possible. Have a good accounts payable process and know your risks for being a victim to embezzlement.
- Forecast the future. A cash flow forecast provides insight into what the practice’s financials will look like up to eight months in the future. It follows your current financials and is a moving projection month-to-month based on how your business is trending. It empowers you to fully prepare before hiring a new employee, paying yourself more or paying more money toward debt. A good cash flow forecast shows much more than total expenses. It shows total cash outlay, which includes loan payments and owner distributions against projected revenues. Most importantly, a cash flow forecast will alert you to any potential shortages coming in the future, based on your current outlay of cash each month. It educates you on what you don’t know that you don’t know about your financials.
- Face Uncle Sam head on. Be proactive about tax liabilities for the year. Talk to your CPA about filing quarterly, and avoid being surprised on how much you owe. Start the conversation about what you will owe in April of next year in June of this year, and put the tax estimates into your forecast. Become proactive with your tax planning using not only your CPA, but also your financial planner, cash flow consultant and banker. Look at strategies throughout the year to to offset taxes and to get more money into your pocket in the long term. Don’t guess. Create strategies now with your team of trusted advisors.
Written based upon an interview with Debra Robinson of Centennial Revenue Management. To learn more, attend the Dentistry Unchained webinar, The Dirty Little Secrets of Cash Flow: Why Net Profits Don’t Always Equal Good Cash Flow on June 2, 2016. Click here for details.