Bottom Line

Of all the business concepts a private-practice audiologist must grasp, cash flow might be the most difficult. It is hard to understand how a practice can have good sales but less cash.

Cash flow, simply defined, is the difference between the amount of cash a business has at the beginning of a period and the cash available at the end of that period. For example, if you have $21,000 at the beginning of the month, show a good month in sales but not revenue collected, pay all the bills, and have $16,000 at the end of the month, cash flow that month is negative. Sales may be up but cash is down.

In a small practice, a steady decline in cash flow can be fatal. If the practice is heavily involved in third-party diagnostics and Medicaid hearing aids, cash flow can be affected in two ways: the low profit margin on the sale, usually under 50 percent, increases the breakeven point and reduces profit, while third-party payments may be delayed until after your due date for payment to the hearing aid company. So you end up paying for hearing aids that have been dispensed but not reimbursed and getting a lower-than-average reimbursement rate.

In an ideal world, patients would all be private pay, give a deposit equal to the cost of goods sold (hearing aids) and allow for a positive cash flow at the end of each month. However, in the real world, insurance companies and health agencies deny claims and hold up payments for as long as possible. Add to that a few slow months where the fixed expenses-rent, salaries, telephone, insurance-remain the same, and your business is suffering from a starvation of cash.

A small practice can survive in this climate by understanding how cash flow works. One way to keep cash flow positive is to slow cash expenditures, such as by delaying payment for hearing aids. Unfortunately, the hearing aid companies charge interest for late payments, but the practice owner can use a credit card to delay actual cash outlay. For example, if an audiologist pays for hearing aids by charging them to a credit card right after the credit cycle ends, the audiologist won't receive the next credit card statement for three to four weeks and then has an additional 21-25 days to make payment on the card. The card balance must be paid before the grace period ends to avoid interest charges. One benefit of this approach is that cards often offer bonus points for merchandise or travel; however, one caveat is that some companies may charge a higher price if payment is made by credit card.

Another way to minimize cash drain is to utilize incentives offered by hearing aid companies. Some companies sell coupons at a discount. If the audiologist buys the coupons when cash is plentiful and uses them when times are slow, the audiologist has hearing aids to sell at a time when available cash to pay them off is low.

Business owners also can take steps to even out anticipated expenses. By keeping good records, it is possible to see an historical pattern of expenses and revenues. Prepaying future expenses in "good" months can help boost cash flow in later, slow months.

Another strategy is to try to ensure more steady sources of revenue. The traditional business model for hearing professionals is to get all the money upon delivery of hearing aids or to contract with an outside lender to help the patient pay them off. Audiologists might consider allowing patients with a good track record to pay off their instruments on time, usually within the first year. This can be risky since a few patients might default, but the vast majority will pay off their debts. "Floating" some cases during good months can ensure a steady flow of income during tight months.

Good cash flow management pays off in many ways. Prospective buyers of the practice are impressed by good cash flow just as much as by a solid bottom line. The practice owner has more cash available if needed and does not have to borrow to make ends meet during tough times-which means patients receive good service at all times.

Reference

Caplan, S. Streetwise Finance & Accounting. Adams Media Corp, Holbrook MA, 2000.

Granville Y. Brady Jr., AuD, owns a private audiology practice in Clifton and East Brunswick, NJ. He can be reached at drgranbrady@optonline.net.