Common Cash Flow Challenges Faced by Physician Entrepreneurs

Common Cash Flow Challenges Faced by Physician Entrepreneurs

This week a guest joins the Wednesday lineup. David Leichter is a CPA and the CEO of Leichter Accounting Services, and he coaches entrepreneurs through the exact cash flow traps that derail physician micro corporations too. Here is David, in his own words.

A practice can look outstanding on paper, but the doctor might still find themself checking the bank account every few days, wondering where the money went. 

The revenue is climbing, and the income statement looks clean, but the owner is still bracing for the next slow month.

Sound familiar?

This isn't bad luck. This is what happens when profit and cash flow get treated like the same thing, but they're not even close!

Physician entrepreneurs run into problems like the above because of how insurance payments work. Billing a patient and collecting on that bill can stretch for months. It can sometimes be longer than doctors expect when they first go out on their own. This is where a lot of trouble starts.

It shows up in a handful of predictable ways, though. And below, I'll walk you through the cash flow mistakes that stall a growing practice, along with what you can do about each one.

Cash flow mistakes that stop physician entrepreneurs from growing

Growing a practice takes money, but so does staying afloat as you're growing it.

I've spoken with a lot of physician entrepreneurs over the years, and here's what I found slowing their growth the most.

Not budgeting for the cost of growth

These catches doctors off guard because it doesn't look like a mistake at first!

Everything on paper says things are going well. But doctors recognize very high profits with strong cash flow, and don't factor that the growth they will need to support, additional payroll, better or newer equipment, will take a toll on cash flow.

They don't budget for those expenditures, which is a trap!

New hires need to be paid before they're fully booked, and new equipment needs to be purchased before it starts generating revenue. If you don't plan for that lag, you can end up in a strange spot: technically profitable, but short on cash exactly when you need it most.

You have to balance the revenue side of your ledger with the potential future expenses associated with growth.

Confusing revenue on the books with money in the bank

A lot of "profitable" practices get tripped up here. When a practice bills the insurance company, the revenue gets recorded on the books immediately. But the actual payment takes time to come in!

Some insurance companies pay every 30 days, while others might take up to 90. That means there's a consistent lag between the revenue you're showing on your books and the money that's actually coming in.

It might look on paper like you're really bringing it in, but your wallet will feel light until the money is paid. Your income statement can say one thing while your bank account says something completely different, and both can be true at the same time.

Taking too much out of the business

Here's the flip side of the same coin.

If you are making plenty of money, and even collecting it, you might still find yourself in trouble if you are not carefully drawing money from the business.

It's a common phenomenon when someone leaves employment to open his own practice: they aren't cautious about how and when they take money out of the business.

Strong collections can lull you into a false sense of security. If you take too much, you'll leave the practice with little or nothing to pay its bills, and you'll feel broke as a result.

The business needs to come first, even when the account balance makes that hard to remember.

Letting receivables age without follow-up

One of the most important reports for doctors to look at is their Accounts Receivable Aging Report, and specifically, the 60+ bucket.

Any receivables that are more than 60 days old need to be addressed. Oftentimes, it's simply a function of the payer being slow to pay... But even then, that needs to be addressed!

Very often, it's just a matter of a few phone calls that can speed up collections. But not always. Sometimes, it comes down to:

• The payer is simply slow to pay

• The billing codes are off and the billings aren't getting processed

• The billing company isn't following up like they should

Left alone, that 60+ bucket just keeps growing.

Underestimating start-up costs

Start-up costs can be a killer, and this is usually where the surprise hits hardest. Before revenue catches up, new owners are hit with:

• Rent

• Payroll

• Equipment

• Basic medical supplies

New owners are often blindsided by this in year one, expecting the numbers to work the way they did as an employee, when someone else was footing these bills.

It's important to recognize that you will be profitable down the road... But that doesn't help much when the equipment invoice is due now and the patients haven't caught up yet.

Growing the team faster than the practice needs

When you own a business, there is this desire to "make it big."

Not a bad mindset, but it can be dangerous too.

What happens often is the practice begins hiring excessively, either for:

• Positions it doesn't need yet

• Roles that can be covered by existing staff

Underutilized staff is the most common expense that kills profits but doesn't get caught. A growing practice will beef up on clinicians or office staff without properly planning the number of clients or tasks they'll complete.

Don't bite off more than you can chew. Let growth happen organically, and don't force it!

How physician entrepreneurs can get ahead of cash flow problems

Time for some good news.

Most of these problems have practical, workable fixes. You don't need to overhaul your entire practice to put them into place either!

Here's where to start.

Use a line of credit to bridge payer lag

I had a practice come to me with a very strong income statement. They were showing 6-figure profits in just their first year of business, and everything looked great from the outside.

But they were struggling with cash flow because Medicare was extremely slow to pay them, and in some cases, they weren't recognizing the billings at all.

The most significant suggestion for them was to take out a line of credit with the bank.

The 60-day lag in payments from Medicare could be covered with the short-term credit from the line, and immediately when payments came in, they could pay the line back.

This short-term solution enabled the practice to steady themselves and figure out how to work with Medicare so that collections came more fluently.

Diversify your payer mix

When you're waiting on insurance companies to pay, you've got two options:

• Diversify your insurance providers, balancing faster, lower-paying insurers against slower, higher-paying ones to keep cash moving

• Factor your hard-to-collect or extremely late receivables, so you get something for billings that seem impossible to collect on

The trick with the first one is finding the right balance where you have enough cash flow to cover expenses, but still utilize the higher payers, so you maximize profitability.

Factoring is less common and not always the preferred approach, but it's there when you need it.

For the hard-to-collect or extremely late receivables, you can also mitigate your losses by factoring in your receivables. It's less common and not always the preferred approach, but it will ensure that at least you get something for the billings that seem impossible to collect on.

Review the AR aging report regularly

Remember the Accounts Receivable Aging Report I mentioned earlier?

Knowing about it and using it are two different things. Many practices know they should watch the 60+ bucket, but few pull out the report on a regular schedule and act on what it tells them.

Very often, it's just a matter of a few phone calls that can speed up collections. This isn't anything complicated, and it doesn't require a special kind of software either. You just need to be consistent!

Reviewing the aging report can really help cash flow, often more than any other report. Making this routine helps you catch problems while they're still small.

Keep cash reserves on hand

I've felt this squeeze myself...

There are so many variables in running a business, and so many things you don't factor or account for. Running a new business perfectly is almost impossible, because at any given time, things go differently than you anticipated.

I've had times when:

• I expected clients to pay timely, and made purchases based on that expected income

• Things cost me much more than I was banking on, and I had to dig deeper into my reserves than I wanted to

The one piece of advice I can offer any practice, or any new business for that matter, is...

To always have cash reserves.

I tell clients to keep two months of expenses handy in case things go south. I'd love to see them keep three, but since even two is difficult for most, I leave it at that.

Keeping those reserves there will give you some breathing room when you have a tough month, or expenses you weren't anticipating!

Rethink how and when you pay yourself

Once you're the owner and not the employee, it's a totally different framework.

You do need to pay yourself, because you still need to live, but your focus has to be on keeping the company solvent and thriving. That means you'll need to pinch a little at first, even when the business looks like it's doing well.

Depending on how your business is structured, you'll take either a salary or a draw, sometimes both.

Either way, you want to be cognizant of cash flow and make sure your business has enough in reserves that it can cover itself when revenue gets thin.

Conclusion

Running a practice will always come with surprises, and you won't catch every one of them before it hits. That's fine!

What matters is building habits now, so you're not caught flat-footed later. Work these habits into how you run the practice. You'll stop wondering where the money went and get more time growing the practice you built!

Build the rhythm

The founders and physicians who make it past the first few rocky years are not the ones with the flashiest side hustle or the biggest launch. They are the ones who track their numbers on a rhythm. Monthly reviews of receivables, quarterly checks on whether their pricing still makes sense, and fixing small leaks before they become floods. None of that is glamorous. All of it is what keeps a growing practice from outrunning its own bank account.

So ask yourself the same question I ask every physician I coach through this. Is your cash flow system something you built on purpose, or something that just happens to you every month? One of those is ownership. The other is just being an employee of your own business.

The identity shift

You do not need a bigger launch or a bigger client to fix a cash flow problem. You need to stop running your business the way you ran a paycheck and start running it the way an owner runs a company.

Join PEA Explorer, $99 a year, for the full resource library referenced above plus the physician entrepreneur community working through this in real time.

Grab the free eBook, Doctor Incorporated, for the full case on why your business structure changes everything downstream of it, including your cash flow.

Staring down your own version of a forty five thousand dollar quarter with nothing to show for it in the bank? Book a Business Strategy Session and we will find the leak together.