If you’ve ever sweated making payroll or wondered how you could possibly scrounge up enough cash to pay your distributor bill on time or just found it hard to pay yourself, you know the stress of having tight cash flow.
Tight cash flow usually happens because the practice’s profits aren’t enough to pay taxes, pay back loans, pay the bills, and pay the owner what he or she wants. Occasionally, owners will inadvertently take out more cash than the practice generates (more often than not, this is a risk for partnerships).
One way to prevent the scramble to make payroll or pay your bills on time is to have a solid plan for managing the cash reserves of your practice. As the saying goes, “cash is king”, so let’s look at a couple of ways to set and manage your cash reserves.
How much is enough?
Let me suggest two ways to determine how much you need to keep in cash reserve.
Method 1: One Month’s expected expenses
This is borrowed from J.R. Armstrong, a CPA at May & Company, who works with OD practice owners from coast to coast. His conservative rule of thumb is to keep one month’s expected expenses in reserve.
For example, consider a $1M revenue, single-OD practice with a solid net income and modest debt service. A sense of annual expenses might look like this:
In this case, the operating expenses and debt service are $720,000 per year ($1,000,000 - $280,000 = $720,000). One month’s expenses, then are $720,000 ÷ 12 = $60,000. Again, to target $60,000 in cash reserves is somewhat conservative.
Method 2: Track the Change in Your Cash Balance
Another useful way to determine how much you need in cash reserves is to simply track, for several months, the beginning, high, low and ending balance in your checking account. For instance, your checking balance might regularly peak at $75,000 and bottom out at $25,000.
Your swing in cash balances, then, is $50,000. And this can inform how much cushion you need in your checking account to
Some practice owners, having struggled with profitability and cash flow for years, will have trouble imagining HOW they could build their reserves to even $15,000 or $20,000. But for others, the mistake runs in the other direction – they keep too much in reserve. A $1M practice just doesn’t need $100,000 in the checking account to support its ordinary operations.
Excess cash in your practice checking account really isn’t doing anything for you. It isn’t buying new frames you can sell or instruments you can use to attract new patients and drive incremental revenue per patient. Whatever interest it earns isn’t that great. It’s even potentially at risk if you get sued. Bottom line: you need an appropriate amount of cash in the practice. Take everything else out as income.
Once you have the target, you have a way to judge how much income you can take from the practice. You should take a regular salary, which is probably half or two-thirds of your total expected income. The practice should be earning more than your salary.
Then, on a monthly or quarterly basis, use the cash reserve target to determine your bonus. Going back to the previous example, if your target is $60,000 and you have $85,000 in the checking account, take a $25,000 bonus. If your checking account balance is below $60,000, skip the bonus and let your reserves build back up.
The great thing about using your account balance is that it keeps you from missing the fact that your P&L net income doesn’t tell you everything about the money flowing out of your practice. Using your account balance to determine how much income to take forces you to take care things like your quarterly taxes and principle payments on loans first, before paying yourself.
It also reminds you that you need to take money out of your practice. So if you have enough money for your expected expenses and you’ve paid the government and your creditors, there’s one more person who needs to be paid: you!
Hayley Stewart, IDOC Financial Services Manager
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Starting a solo optometry practice can be a daunting task, especially considering most optometrists do not graduate optometry school with a strong grasp of the business aspects of running a private practice. There are many things you need to do prior to your grand opening, but the work doesn’t... Read more
Office Managers are responsible for setting the expectations for all office employees. The optical staff is a unique situation because the patient experience is easily measured. Good communication and clear goals will go a long way to improve patient satisfaction in this very... Read more
Google and social media have changed the ways we look for information, discover area service providers and research options for health care, and as a result, many Optometrists who own a practice now question which tactics are the most effective to increase brand awareness, number of... Read more
The Science of Selling
Have you ever made what you considered an iron clad case for why a patient should purchase a certain product or service from you, only to have them walk out without ever making the purchase? As clinical professionals, we can be very logical in our approach with... Read more
Your optometry practice is incredibly valuable to you. “Well, Nathan” – you may say – “of course it is!” But have you ever thought of why it’s valuable?
You spend most days pouring your blood sweat and tears into it: hours and hours of patient care, planning,... Read more
The internet isn’t usually a popular topic in conversations I have with owners and staff members of optometric practices. Dealing with reviews and competition from web-based retailers along with the challenge of creating and maintaining a website and good social media marketing may have many... Read more
Optometrists in private practice sometimes fail to offer a clear reason why someone should choose them for their vision care over competitors - on their websites or in other marketing collateral – sometimes when you try to market to everyone, you fail to capture... Read more
When working with small business owners to create marketing plans and strategies, I run across the following scenario far too often: “Hey, I’m not sure how to log in to my Google listing. My office manager used to handle that for me, and she’s not on the team anymore... Read more
“You might as well ask me to describe the essence of music, or the color of starlight.”
Did you make any New Year Resolutions? Well, I did. I do every year, and in keeping with my obsession with goals and metrics that I have professed here repeatedly, I write them down... Read more
For starters, I’m not a licensed psychologist, I just play one as a practice management consultant. It’s been my observation that whenever human beings come together in an environment where they are required to work together and interact, inevitably some tension and conflict will arise.... Read more
Your schedule has gotten busier and you’ve hired an associate OD. While you would like to keep the associate’s schedule filled most of the time, it’s not uncommon for an associate to have some gaps in his or her schedule – at least in the beginning. This often leads to some resentment by the... Read more
Before anyone panics, I am not suggesting that most practices go out and spend $80,000 or $100,000 on a COO tomorrow, or that your manager is due a large raise for 2018. I typically only recommend that type of role for multi-location practices grossing over $2M-$3M per year: practices... Read more
Sometimes it’s not the inventory you choose to carry or the reps you choose to indulge. It’s not the pricing or the shipping or the cadence of your reorders. As we head into the tail end of the holiday season, I can’t help but think of the process of opening presents.
Everyone has... Read more
Texting is an incredibly tempting mode of communication for marketing-minded businesses competing for the attention of consumers, primarily because the open rates on a text from businesses to consumers are incredibly high (98%) compared to other forms of communication (email is around 20%,... Read more
“How many frames do I need?” “How many frames should I carry?” “How much stock should I have in inventory?” It doesn’t matter how you phrase it, at least 1/3 of my consultations start the same way. I’m going to make this all very, very easy for... Read more
If you are in a competitive area, you’ve already learned that marketing is a necessity to attract brand new patients to your practice. It’s easy to confuse marketing tactics – sending email, creating Facebook posts and advertising in a community magazine, for instance –... Read more
A practice owner pulled me aside at our most recent conference in Denver to start thinking of an exit plan. I always ask two questions when these discussions come up:
“How long do you see yourself continuing to own your practice?”
“How is your retirement savings coming... Read more
A consumer-centric culture with a focus on customer service is becoming increasingly important for brick & mortar businesses. While I do believe most practice owners strive to deliver on great service, it requires a team effort. I often hear owners tell me they want to be known in their... Read more
Most businesses have polices that employees are required to follow. In general, office policies are a good idea. Policies provide structure for how to conduct business and create consistency around processes and operations. But in a service-based industry, well intended but rigidly executed... Read more
With all the talk of private equity roll-ups and regional alliances, many practice owners are concerned that if they aren’t a large, multi-office, multi-doctor practice, they don’t have a future in independent optometry.
Is that... Read more
One of the interesting mysteries that I get to unravel in many practices is the mystery of tight cash flow. Sometimes it’s obvious – a small practice with low profitability, for instance. But other times it’s not.
First off, what is tight cash flow? Here’s my simple definition:... Read more
Doctor: Would you like to order your contacts today, Mrs. Smith?
Mrs. Smith: That’s OK. I’ll just take the prescription and get them online.
What happened here? You just did a thorough, high-tech eye exam... Read more
For practices looking to grow, there are basically two paths: see more patients or generate more revenue per patient. Ideally, a practice will do both. One thing I consistently hear from ODs is that it’s hard to generate high revenue from contact lens patients. Even when selling annual... Read more
Can you find 20 or 30 minutes a week to hold a staff meeting? You might be surprised at the impact that it has on your optometry practice.
Your staff is your most valuable business asset. Your investment in optometry marketing, technology, office design, etc. will fail to deliver an... Read more
The very phrase can cause irritation, anxiety and bewilderment in the minds of owners who understand that they should somehow be participating in the conversations across the various social media platforms – but which ones are the best for optometry practice... Read more
While there is more than one way to achieve success, there are a few common traits that successful independent optometry practice owners have in common.
They refuse to accept the status quo. While others remain stagnant, ignore trends, and complain about the... Read more