Have you ever heard the expression in business that 'cash is king'?
They say this because if you’re a business owner and you don’t have cash, you’ll find that creditors, bankers, and the tax man will come-a-knockin’, and not just for a brew and a chat about the weather!
They also say this because strong profit doesn’t necessarily mean strong cashflow – these are not the same thing. It has been uttered more than once that you can survive longer on cashflow without profit than on profit without cashflow.
Of course, a long-term strategy of one without the other is a race to the front of the bankruptcy queue. The point is to place priority on managing cash collections and cash payments over profit for the short term. But both should be monitored closely because, long-term, one cannot last without the other.
Allied health businesses are no exception.
Despite having some cashflow advantages over other small businesses and their services, its importance to our society beyond the almighty dollar, allied health businesses are still just that… a business. Remember, without your business model being sustainable, you can’t embark on your quest to help people.
Sustainability isn’t just something that happens. It takes tracking, planning, and action. Tracking is knowledge. Knowledge is the power to plan well and importantly, to act!
Allied health services can be required by the patient for a short time to clear a minor ailment through to ongoing treatment that significantly improves life quality and indeed, ensures or extends survival. As a result, fluctuating demand for services can make managing cashflow difficult, particularly if cash inflow and collection are left to their own devices.
Tip 1. Know your income, know your strengths
The most important first question to ask yourself is: What are your cashflow strengths that you can leverage and take advantage of before focussing on the negatives?
The cashflow advantages allied health businesses have over some other businesses are in cash collections.
Some examples include:
- Sales are usually timely – I.e. paid on the day or even in advance for blocks of appointments;
- Some income is sourced from essential treatments for serious health conditions - I.e. patients won’t opt out;
- Some less essential treatments are often on scheduled treatment plans for injury/pain/prevention management, keeping patients motivated to stay the course; and
- Multiple sources of subsidised care – Medicare, NDIS, Department of Veteran Affairs, My Aged Care, and private health, meaning it’s often affordable for the client even where less essential.
A key to managing cash inflow is, therefore, to understand who your patients are and their buying behaviours. It’s knowing your income.
More importantly, it’s finding who is not yet your patient or not your patient more often. Potential patients, or patients who don’t use your service regularly, with the above traits, should leave you asking how do you make them your regular patient?
How do you get the right level of ‘heads on beds’ to steady that lumpy bumpy cash inflow?
Like any other business, as an allied health professional, you too can target your ideal client or grow a good existing one where appropriate.
That’s not to say you close the door on other one-off patients as they can be great cashflow plugs if managed well.
But knowing your ideal patient does give you a clear guide in terms of who your referral partners should be and what your branding messages should say i.e. your operating and growth strategies.
Tip 2. Know your costs, know your risks
Of course, like all good intentions, plans and strategies don’t always succeed immediately. Often, marketing efforts are a slow burn; a long-term investment where persistence, repetition, and consistency are the only way to ultimately succeed.
So, in the meantime, where cash inflow slows down, or something like a global pandemic impacts the business income significantly, it can seem like you’ve hit a period of drought. All the while, the cash you do have flows out of the bank account like a flood-inspired rapid into an open sea of daily bills and long-term debts.
Also, where you’re changing your service delivery model from a personal to practice model, navigating the increased costs can look about as daunting as navigating the same rapid on an inflatable mattress!
The next key cashflow step is to understand your cost structure of fixed and variable costs, your debt repayment requirements and any other expected current cash outlays.
From this, breakeven analysis can be undertaken to know how many ‘heads on beds’ are needed to keep the lights on. Then how many ‘heads on beds’ to achieve a certain growth target, and so on.
If projected income in your budget isn’t enough to cover costs initially, you have an ‘income gap’. It’s ok! At least now you know.
This knowledge can keep you focussed on creating manageable bite-sized income targets to reduce the ‘income gap’, allowing you to develop and implement an operating and growth strategy to ensure you are increasing the right kinds of business income (identified in Tip 1.) to cover the ‘income gap’ and then more.
Tip 3. Know your priorities, set your voyage
The above tip also helps you narrow your focus on what purchases are really needed and when. Maybe that new state-of-the-art consultation table isn’t absolutely necessary now but something to work towards over the next twelve months?
Stocking your practice with only the popular high-sale treatment accessory items early can also be a good cashflow plug.
This ensures you’re not holding onto niche and obscure treatment products for a long time. The latter can be ordered as needed if a patient requires them, and also avoids obsolete stock if they never do need them. This is not about reducing costs; it’s about trimming the fat. Reducing sales-driving costs is a bad idea.
You can’t shrink your way to greatness. It’s about finding the costs and assets that are unnecessary and not sales drivers and reducing them as much as appropriate.
An often-overlooked way to know what you can and should not buy is provisioning for costs.
Bank your tax obligations in a separate account and provision in your data, and set aside cash, for leave, superannuation, and other ATO obligations.
Knowing these obligations from day-to-day can put a lid on any shiny new car dreams very quickly but also keep you in business to one day truly realise that dream.
Tip 4. Know your rescuers, help is nigh
Where achieving the right number of ‘heads on beds’ to cover costs early is a mission too far, which is common in the early start-up or growth phase of a business, the focus needs to be put on other sources of cash that can carry you over the waves for a bit.
Some of these include:
- Borrowing (including private lenders);
- Collection of debtors – don’t offer accounts or offer small discounts for block appointment prepayments;
- Talk to your creditors for better payment terms;
- Capital introduced by you; and
- Sale of unneeded assets.
And when cash does eventually come in at the required level, keep it available. Don’t lock it up unless it is surplus to your current and future needs.
Think about whether that new consultation table needs to be paid in cash or if there’s another form of reasonably priced finance to spread the purchase out over time.
The same applies to spreading long-term expenses like insurance (which is a large expense for risky businesses like health care providers) over months via premium finance options.
Tip 5. Don’t go the voyage alone, RSM can help
Staying the course of tracking, planning, and acting will serve allied health practitioners well. We know this because we’ve helped many clients in the industry on this journey.
One recent example was a remedial therapy and anatomy training business. Upon COVID-19’s arrival in Western Australia, the drying up of the therapist’s training income (sourced mainly from overseas and interstate) stopped the business as they knew it, but not its fixed costs!
We helped the client understand their cash outlay obligations for the months and year ahead and were able to advise them what their breakeven point was.
As the ‘income gap’ became clear to the client, the fear of the unknown vanished. Fear turned into a positive challenge. Being less daunted by the situation, they could then focus on growing targeted clinical (non-training) income and developing alternative revenue streams in manageable bite-sized amounts.
We helped the client work out the number of regular ‘heads on beds’ needed to cover cash outlay and survive.
And that’s just what they did.