Financial strategies for successful medical practice management
Learn financial strategies that help deepen patient loyalty and increase profitability for your medical practice.
With patients taking on more of a proactive role in today’s changing healthcare environment, it becomes more imperative for medical practices to invest in the data analytics, state-of-the-art marketing and staffing necessary to deepen patient loyalty and increase profitability. Practice improvements may be small or large and some may require financing, but there are many options for your practice to consider in meeting your goals in this competitive environment.
Sourcing Working Capital for Short-term Need
As Medicare and Medicaid and commercial insurers may take longer to remit payments and the individual consumers wait until they meet their deductibles to schedule services, practices often see the bulk of their profits in the second half of the year. This often creates the need for seasonal working capital in the first six months of the year. With low interest rates and tax-deductible interest, a line of credit can be a cost effective way to optimize cash flow and provide additional liquidity for the practice while waiting for cash reimbursements from insurers and payments from patients.
As a revolving source of funds, a line of credit provides an efficient way to finance short-term expenses such as paying quarterly taxes for practice partners or funding employee healthcare premiums or to invest in future profitability through marketing programs or staff training. Repayment is usually interest only monthly with the balance due at maturity. By having the repayment scheduled as interest only, it minimizes the required monthly payment and can provide for more financial flexibility for the practice.
Rules of Thumb for Credit
Conventional practice management recommends that a practice maintain 90-120 days of operating cash reserves or available liquidity to meet seasonal cash requirements—an effective measure when determining an appropriate amount for a line of credit. As the accounts are paid and cash is collected, the lines can be paid down and are then eligible to be drawn upon again at various points in the business cycle. Credit availability is determined on the percentage of eligible accounts receivable, which can be customized based on the practice's payor mix of Medicare/Medicaid, insurer or individual payments.
The use of a seasonal working capital line of credit can be consistent with a practice management goal of having little to no debt, without providing cash drains on the practice or requiring partners to contribute their personal cash resources as equity.
Term Loans and Equipment Financing Solutions
For larger dollar investments, such as new office equipment, term financing, which includes term loans, equipment financing or leasing, may provide the ideal solution. These options allow practices to pay for long-term assets over time with predictable payments. Additionally, since lease payments are considered business expenses, they may be tax deductible.
Before You Seek Financing
Practices seeking funding solutions should have effective billing and accounting systems that can generate reliable financial reporting for the past 2 to 3 years, preferably prepared by a reputable Certified Public Accountant. It is also helpful to have a budget for the coming year to represent clear goals for anticipated capital expenses.