Managing Cash Flow

Global business executive Reece Tomlinson explains the importance of managing cash flow in clinic and how to effectively control it 

Cash flow management problems have led to the demise of many successful businesses. According to corporate credit reporting firm Dun and Bradstreet, poor cash flow management causes 90% of small business to fail. Additionally, a recent study by the Business Development Bank of Canada suggested that poor cash flow management is the largest cause of business failure. Another by the coveted US Bank suggests that 82% of all business bankruptcies are due to poor cash flow management. 

Effective cash flow management should be made a priority to ensure the success of any business. In order to further explore and understand this, we must understand what exactly does ‘cash flow’ mean? Simply stated, cash flow is the movement of funds in and out of the business. There are two possible cash flow outcomes that will result from this activity: positive cash flow occurs when cash inflows during a period are higher than the cash outflows during the same period. Conversely, negative cash flow occurs when more cash is spent than generated. The generation of positive cash flow is, arguably, the most critical measure of success in operating a financially sound and sustainable clinic or business.3 

By trade, I am a chartered professional accountant and an adviser to many companies, with a focus on turning around businesses in potential danger. I have learnt that there are certain cash flow indicators that all clinics should be regularly reviewing and paying close attention to. Aside from more obvious indicators such as law suits over non-payment, defaulting on payroll obligations and legal payment demands, there are five indicators that individually or in any combination, are direct warning signs of current or impending cash flow problems. 

Negative cash flow indicators: 

1.                   Late payment or non-payment of suppliers and bills: although this may be a clear sign of cash flow problems, it can be easy to overlook the risk that late bill payments have on your clinic. Not only do late payments increase the cost of paying bills, as you are typically subject to interest or late fees, but they also decrease your credit score and allow bill payments to build. 

2.                   Lack of profitability from operations: profitability can be separated into two key categories; operational profitably – the profits that are generated from the operations of the business, and net profitability – the profits you generate after you consider things such as taxes and depreciation. In order to make things simple, it is best to place a higher degree of emphasis on operational profitability, as this generally depicts the money coming in from daily operations. Although generating positive cash flow is ultimately the objective in any business, we must also be cognizant of operational profitability, as it is a good indicator of whether or not the clinic is making money and capable of generating cash flow from its day-to-day operations. Consequently, when the operations of the clinic are not making money, it is a very clear sign of the cause of current or impending cash flow problems and should immediately be noted. 

3.                   Negative working capital: working capital, which is defined as ‘current assets less current liabilities’,5 is an incredibly important measure for any clinic to pay attention to as it primarily signals the company’s short term financial health. The aim is to have working capital remain consistently positive, as this signals that the clinic has more current assets (cash and accounts receivables) than it does current liabilities (accounts payable and short term debt). This represents the capability of carrying on business without requiring that external cash be re-injected back into the business in the form of debt, or perhaps the owner’s money. Negative working capital is a red flag of more severe cash flow problems. Taking things like renovations, the purchase of new equipment and investment in long-term assets out of the equation; negative working capital can signal mismanagement of cash, major financial challenges and generally means that spending has exceeded the incoming cash flow and therefore is not sustainable. I would recommend reading Entrepreneurial Finance by Steven Rogers if you are eager to learn more about this very important principle in accounting and how it relates to your clinic. 

4.                   Borrowing to keep the company going: having on-demand debt instruments such as lines of credit and credit cards can be both a blessing and a curse to the clinic. In many ways, on-demand debt instruments can be a great way of reducing expenses, increasing flexibility and actually preserving cash. However, they also present the potential for mismanagement, which can exacerbate the problems listed above and can create sizable interest payments from lenders and suppliers, which only further squeezes cash flow. 

5.                   Surviving from the cash coming in day to day: although there is no definition on what this exactly means, it can generally be referred to as ‘the money goes out as quick as it comes in’. While one would assume that this type of issue impacts only small clinics, it often impacts small and big clinics alike. The reasons that clinics can get into this kind of situation vary, but typically, it is derived from a combination of poor operational profitability and spending cash ineffectively, such as on long-term assets. The purchase of the ‘newest’ cosmetic laser on the market is an example of this. While it may be a strategic long-term investment, it also has the ability to drain the company of its lifeblood; cash on hand. 

Now that some cash flow problem indicators have been identified, the next step is understanding how to strategically manage and correct these issues in order to ensure the longevity of the business or clinic. It is crucial to note that issues like these must be identified and mitigated as soon as possible, as they can quickly become the demise of any organisation. 

Fortunately, there are six common tactics that I have utilized to improve cash flow and correct the trajectory of a company heading down an otherwise ominous path. Unfortunately, there is rarely a single solution that will solve all cash flow problems and these solutions require hard work, commitment and sometimes very tough decisions to be made. 

Correcting cash flow problems 

Some tactics that can be used to correct cash flow problems consist of: 

1.                   Lower your costs: when a clinic is facing cash flow issues, which are derived from the lack of sufficient profitability from operations, lowering costs is a key element in turning the situation around. The lack of sufficient profitability from operations influences the clinic dramatically. Left unchecked, insufficient profitability can create a situation where all of the above mentioned indicators of cash flow problems appear. Consequently, in such a situation, action needs to be taken to correct the underlying problem. Regardless of the size of the clinic, discretionary and non-crucial costs can be decreased or cut out entirely. Depending on the severity of the cash flow problems the clinic is experiencing, the aim is to cut costs so the company is generating positive cash flow again without detracting from the core of the business and its ability to provide its goods or services or impact the primary business, generally referred to ask discretionary expenses, such as; travel, non-immediate ROI advertising, attending events, entertainment, technology, printing, employee perks and etc. For example, one should cut expenses that their customers would never see versus those that could impact the customers’ experience. In specific circumstances where cost cutting alone may not be enough to generate positive cash flow, the goal becomes to cut costs as significantly as possible without impacting the ability of the business to deliver its products or services to customers. 

2.                   Delay or revise capital expenditures: a capital expenditure, such as the purchase of an aesthetic laser treatment device, is generally defined as an expense that benefits the company over a long period of time. Many clinics find themselves with cash flow problems due to capital expenditures in which they use cash flow from operations or their cash reserves to fund them. Whilst reinvestment back into the clinic is not a bad thing, the problem can stem from the fact that free cash flow is needed for operations and by using such cash flow to fund major purchases and investments, it reduces the clinic’s cash on hand. Utilizing cash on hand for capital expenditures can create a situation where the clinic may become incapable of maintaining the operations of the business. This situation can become a slippery slope and can lead to issues such as the inability to pay bills on time, missing critical obligations, and going into debt to cover operations. The simple solution is to either cease such purchases, or rather finance them through other methods such as long-term debt, capital leases or slowing down the rate of investment. Although it may seem counter-intuitive, the cost of borrowing for a capital expenditure may be significantly less than the cost of having to deal with continued cash flow problems, as well as the costs associated with late payment, high interest-bearing forms of debt. 

3.                   Decrease customer payment terms: if customers are provided credit by the clinic it can present a plethora of challenges from a cash flow perspective. In such an event, aim to reduce credit provided or reduce the time in which a customer is permitted to pay their invoice. For example, if the customer is provided with 30-day terms to pay an outstanding invoice, either reduce the terms, or offer an early payment incentive, such as 2% off the invoice, if it is paid within ten days in an effort to entice the customer to pay it early. Depending on circumstances, cutting credit to customers entirely or utilizing a third party, such as an aesthetic treatment-financing firm, to provide the customer with credit can help reduce cash flow stress. Note that if the majority of sales are provided on customer credit, one should elect to find an alternative solution such as using a third party to provide credit rather than simply cutting credit entirely. 

4.                   Focus on reducing ‘cash flow lag’: one of the biggest causes of cash flow challenges for businesses in any industry is simply due to cash flow timing. Cash flow lag is not an official term, but is something I use to describe the time difference between when cash comes in versus when it goes out. The larger the lag (difference) between when it goes out versus when it comes in, the greater the cash flow pressure. Unfortunately, for most clinics, cash is often required to be spent prior to it coming in. For example, if the clinic is performing dermal filler treatments, the clinic is therefore required to have these products on hand in the form of inventory, which they can then utilize for a patient’s procedure. Consequently, the clinic is required to purchase the dermal fillers prior to the treatment and only receives money from the patient after the treatment. The delay between when the money is spent versus when it is received creates pressure on cash flow at some incremental level. In order to decrease cash flow lag there are a few simple things the clinic can do: 

 

a. Purchase on supplier credit: many suppliers will provide clinics with credit lines where payment is due in 30 days rather than immediately, which allows the clinic to collect money from its patients prior to spending it on products. 

 

b. Ask patients to pay up front: this may or may not be possible but getting the patient to place a deposit for treatments, even at a slight discount, can help the clinic reduce cash flow lag dramatically. 

 

c. Utilize common forms of credit: most clinics have credit available to them in the form of credit cards or lines of credit. Similar to purchasing on supplier credit, using common forms of credit can help reduce cash flow challenges due to cash flow lag. It should be noted, however, that some forms of credit, such as credit cards, are great tools if used properly. When not used properly, they can present large interest rates, which can present even further pressure on cash flow. 

d. Reduce inventory levels: buying large levels of inventory may give you a sense of security, but it can also become a burden on cash flow. Focus on purchasing the level of inventory you need and place more frequent orders. 

 

5.                   Analyse the return on investment (ROI): many clinics find that they spend money on items and activities, for which they then have a difficult time analyzing a direct ROI to the clinic. Return on investment can be defined as the benefit to the clinic from investing money or resources in an activity, piece of equipment or asset. Whether it is spending on various forms of marketing, a new position in the clinic or the newest equipment, it is recommended that you closely analyse return and potential return on all spending. I personally spend a lot of time with clinic owners around the world, and I am consistently amazed at how little analysis is performed to determine whether spending money on certain things is actually generating a return on investment for the clinic. Therefore, strategically analyzing all spending is critical, and can be a great way of identifying activities that are not generating positive cash flow. This can then be a method for saving cash and allows the clinic to focus more on the activities that are actually generating a return, which in itself can benefit cash flow. 

6.                   Realize that growth costs cash: many clinic owners focus on the growth of their business. It is important, however, to realize that growing actually costs money. Growing at a faster pace than the rate of which the company is generating cash will create negative cash flow and burn through available cash. The best way to manage this is to ensure that you have sufficient working capital prior to going down the path of growth and that you have plans for how you will manage surprises. A mentor of mine, Warren Rustand, chairman of SC Capital Partners and previous CEO of more than 17 companies, uses the term ‘the rule of 24’, wherein you can expect things are going to cost two times as much and take four times as long to get to where you want to go in a growth scenario. It is crucial to limit growth so it is sustainable and, if it is not sustainable, look for long-term debt or equity investment solutions finance growth versus relying on cash flow. 

Summary 

Many of the cash flow issues that a clinic faces can be easily identified, addressed and corrected. To do so requires initiating some challenging discussions and potentially making some humbling decisions. If you are experiencing these challenges know that you are not alone and they can indeed be corrected if acted upon in a timely and systematic approach. It is always recommended that cash flow problems, or potential problems be addressed as soon as possible.