Four Critical Steps for Managing Practice Growth
Most physicians welcome the opportunity to expand their practice and reap the benefits of increased income. Yet expansion can put the practice under significant cash flow pressure. “Success” may come with the unintended consequences of increased creditor pressure, banking covenant breaches, inability to pay tax obligations on time, and difficulty in obtaining much-needed financing, to name a few.
Before jumping on the growth superhighway, take a few moments to sharpen your pencil and plan the route.
Create a detailed financial plan based on a reasonable forecast of future revenues and the associated budget to support it.
A few questions to ask as you build your plan:
- How do your growth expectations align with your experience historically? Are there changes in market conditions and/or your marketing plan that suggest the future will look materially different from the past?
- Have you accounted accurately for insurance reimbursement rates and time delays for collection?
- Have you captured all of the one-time and ongoing costs associated with business growth? Are your assumptions about expenses reasonable?
- Have you accounted for federal, state, and local taxes?
Build the accompanying cash flow statements to gain clarity on the financing requirements to support your planned growth.
Capital outlays for buildings, leasehold improvements, and equipment will clearly precede the revenue that they’ll make possible. You’ll also pay most of your operating expenses before you realize the associated cash inflow for services rendered. As you develop your projections, ask yourself:
- Are processes in place to ensure that insurance claims are rendered swiftly and accurately?
- Have I assigned responsibility to manage collections?
- What happens to cash requirements if key assumptions in my financial plan vary by 10%, 20%, or 30%? How much risk am I willing to assume?
Take stock of your current financial resources and borrowing capacity.
As you consider whether to finance growth using your own resources or through bank borrowings, ask yourself:
- How “credit worthy” is my practice? How does the health of my business affect the interest rate that a financial institution might offer?
- What kind of debt makes the most sense given my current circumstances? Should I lease or buy equipment?
- What terms and conditions would my financial institutions impose? How will they affect my operating plan? How much additional administrative overhead will be necessary to satisfy their reporting requirements?
- Have I allowed for sufficient cash reserves to satisfy my obligations should my financial plan or cash flow projections vary in an unfavorable direction?
Institute a reporting mechanism to compare your revenue forecast, budget, and cash flow projections to actual.
Identify the causes of significant variances and use this information to update your planning documents.
All of the foregoing may seem like an awful lot of numbers to crunch. Fortunately, your accounting and tax professionals have the knowledge, experience, and tools to provide the information you need to plan for growth using a custom-designed financing strategy.