September 13, 2017 by Reece Tomlinson
Running a successful clinic requires a lot more than just treating patients, and many practitioners can find themselves in hot water very quickly. Reece Tomlinson shares his strategies to save a failing clinic, including recognizing red flags, reducing operating costs, and listening to your staff.
It’s said that there are two types of business owners; those who have lost it all (or been very close to it) and those that will. Why is this relevant, because most businesses go through periods of challenges that require strategies aimed solely at turning the ship around. This article is for those clinic owners and managers who are going through challenging times, where the stakes are high, as it specifically pertains to strategies and tactics aimed at changing the course of the clinic from one that is potentially ominous to one that is lucrative and sustainable.
From my experience as a Chartered Professional Accountant, an advisor to companies on how to turn around their businesses and leading several global businesses including some experiencing significant financial and operational related challenges; I believe that there are certain indicators that indicate that the clinic is struggling both financially and otherwise. Taking aside obvious red flags, such as lawsuits over non-payment, defaulting on payroll obligations, and legal payment demands; there are four easily identifiable indicators, which on their own or together in combination, are direct warning signs that the clinic is experiencing current or impending challenges regarding its ability to operate.
These indicators consist of:
Constant shortage of cash. Generally, being constantly short of cash can be summarized as the inability of the company to accumulate the cash required to pay operating costs and, therefore, move past the point of money going out as quickly as it comes in. The issue of being constantly short of cash impacts businesses of all sizes in all industries and is a major cause of concern as it signals that the business is not sustainable
Decreasing sales and increasing operating costs. When sales are decreasing, and operating costs remain flat and/or are increasing; this presents a situation that will plague the clinic if left unchecked. In such situations, the ability of the clinic to generate positive cash flow becomes sizably challenged.
Inability to generate positive cash flow. The difference between the cash that is generated by the business and that which is spent can be defined as the cash generated by the business. Therefore, if the clinic is not capable of generating positive cash flow it will, if untreated or if no additional cash is injected, slowly fade out into financial default and irrelevance. Generating positive cash flow is a critical requirement for any business
Inability to meet financial commitments. When the clinic can no longer meet its financial obligations including payroll, debt repayments and payments to suppliers; it is a major indicator that the clinic is experiencing significant issues, which, if not addressed, will lead to imminent clinic closure.
When it is identified that the clinic is in trouble and burning through cash at a rate that is not sustainable; it is paramount that the clinic identifies the amount of cash available with which it has to work with and precisely how long it will be until the clinic burns through said cash at its current rate. A simple formula to calculate the amount of time the clinic has until it is out of cash, often referred to as the ‘runway’, is: cash available/daily burn rate (required expenses to keep the clinic in business) = number of operating days before the business is out of cash. Ideally the runway should be as long as possible, however it should be known that there is no right or wrong answer as it relates to the runway length for the business; however, it is critical that this number be determined as the shorter the runway the quicker the clinic needs to implement changes and the more drastic they must be as the issues will need to be corrected swiftly.
Although I have identified some common warning signs to indicate that a clinic may require a turn-around strategy, and made clear the requirement to have clarity surrounding the time frame in which the clinic has to work through the challenges and turn itself around before it runs out of cash. However, the real challenge surrounds the notion of exactly how do we correct the problems causing the challenges being experienced by the clinic and, just as important, how do we correct them in the time frame that we have available? Depending on the severity of the situation, there are six common tactics which I have utilized and would strongly recommend to correct the trajectory of a company heading down an otherwise ominous path. Unfortunately, there is no single solution that will solve the problems a clinic may be facing and invariably these solutions require hard work, commitment and sometimes very tough decisions to be made. Below are some tactics that can be used to turn-around the clinic, categorized on the severity of the challenges being faced. Note that these changes should be made quickly as the shorter the runway available, the shorter the period of time available to correct the situation.
When the clinic is experiencing challenges or needs a full-on turn-around, the first step is ensuring that the clinic’s management team and employees are on board with the changes that may need to occur to get the clinic back on track. In short, they need to fully support the core purpose of turning the clinic around. From experience, I would recommend ensuring that employees are made fully aware of the challenges, why changes to correct them are required, the plan moving forward and ultimately what is required of them as a team and as individuals to get things moving in the right direction. While doing so, it is important to ensure that the team remains optimistic that things can turn-around and that the future of the company, including their own individual roles, will be better due to the restructuring. In such situations, transparency is critical, and employees will respect management for being honest about the situation, as they are probably much more aware of what is going on than given credit for. Rallying the team is critical for all turn-around situations and should not be overlooked, for in order to make the turn-around a success, your team needs to be engaged and on-board.
After you have made your management team and employees aware of the situation and rallied them around the core purpose of turning the clinic around; it is imperative that the clinic management and owners listen to the employees of the company. The clinic’s employees will have ideas how to correct problems that have plagued the clinic for years. Small wins add up to big wins and your employees will certainly have ideas to implement that can improve profitability while decreasing costs.
When a clinic is facing cash flow issues that are derived from the lack of sufficient profitability from operations, lowering operating costs is a key element in turning the situation around. The lack of sufficient profitability from operations influences the clinic dramatically, as it causes the company to spend more money than it is bringing in. Consequently, in situations where operating costs are bleeding the clinic of cash, 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 financial problems the clinic is experiencing, the aim is to cut costs, so the company can return to a position where it is generating positive cash flow; this may include all costs pertaining to operations and strategic growth, including employee salaries. Reducing staff is certainly not a fun decision to make, however, it may be entirely necessary to lower the operating costs of the clinic to a profitable level. The shorter the runway, the more operating costs need to be decreased and the sooner they should happen. However, in certain circumstances where cost cutting may not be enough to generate positive cash flows, the goal is to cut costs as much as possible without impacting the ability of the business to deliver its products or services to customers to reduce the cash spend while more severe tactics can be used to improve the situation.
A lot of clinics find themselves in challenging situations due to unnecessary expenditures that can create negative pressure on cash flow. It is very important to note that available cash flow, sometimes referred to as free cash flow, is needed for operations and by using free cash to fund unnecessary expenses that are not directly correlated to the ability of the clinic to produce sales or create profits, reduces the available cash on hand. The utilization of cash on hand for unnecessary expenditures creates a much higher probability that the clinic is not capable of maintaining the operations of the business, and, therefore, gets into precarious situations, such as not being able to pay bills on time, missing critical financial obligations and going into debt to cover operational expenditures. The simple solution is to cease unnecessary expenses entirely and delay or finance capital expenses through other methods, such as long-term debt, capital leases or slowing down investment in the clinic. It may seem counter-intuitive but the cost of borrowing for a capital expenditure may be significantly less than the cost of having to juggle with continued cash flow problems and the costs associated with late payment, high interest bearing forms of debt (credit cards, short term lending, etc.).
Most businesses have key products or services that they are known for and deliver the majority of their revenue and profits. When it comes to the procedures performed by the clinic, it should be cautioned that focusing on too many procedures and particularly those with limited or unknown profitability can be causing considerable financial harm to the clinic. Subsequently, it is very important that the clinic understand and focus on the procedures that are delivering adequate levels of profitability and are considered of value to the patient base of the clinic and demographics of the local target market. When reviewing procedure specific profitability, the clinic should take into consideration all aspects of the procedure including lease or finance costs of machinery, training costs, marketing and other related costs. For some clinics, it can become obvious that certain procedures are simply not generating adequate profits and, in some situations, are costing the clinic money in the form of lost opportunity costs and the requirement for people and capital to be tied up performing procedures that are not generating profits.
When the clinic needs to increase sales or profitability, the clinic should review procedure pricing and determine whether changing pricing can impact demand and profitability. For example, if the clinic is performing 100 dermal filler treatments per month at an average rate of €300 euros per treatment with the cost of the treatment being €200, a 5% price increase decreases demand by 2%, it will provide an increase in profitability of 12.7% and an additional €1,270 per month in income. Further, with fewer treatments less support is required and therefore costs decrease and/or more attention can be placed on patients, which helps the clinic in a myriad of other manners. The visual of this scenario is below.
Many clinic owners want to grow their business and make serious attempts to do so. It is important, however, to realize that growing a clinic requires money and often drains the clinic of available cash, which may be needed to sustain operations. Growing at a pace quicker than the rate of which the company is generating cash will create negative cash flow and burn through cash on hand, which in many cases is a significant cause of financial harm and is not sustainable. Therefore, the simplest 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, which will always come along. As importantly, profitable growth, which can generally be defined as growth that can be fueled by the cash generated by the operations of the clinic, should be the focus of any clinic that is experiencing financial or operational challenges.
If the clinic is experiencing challenges pertaining to meeting its financial obligations or is expecting to no longer be capable of paying its bills on time (or in general) or making loan payments and etc; it is critical that the clinic makes its suppliers and financiers aware of the situation. It may seem counter-intuitive, however, providing financiers and suppliers with notice that the clinic is going to be late paying bills while simultaneously asking for revised terms until the turn-around is completed can often dramatically lower borrowing and supplier related costs. Most financiers and suppliers understand that working with a clinic to implement a feasible payment plan for the repayment of amounts outstanding, is a better, cheaper and higher return option for all parties than taking more drastic actions such as calling loans, filing lawsuits, etc. In summary, turning around the clinic, in almost any situation, can be done. However, to do so requires challenging discussions and potentially humbling decisions. If you are experiencing these challenges know that you are not alone and they can be corrected but you will need to act and the sooner the better. Even if you are not experiencing cash flow challenges, you can still apply many of the above tactics to improve cash flow and by doing so make your clinic healthier and stronger financially.