Over the last few years the concept of asset protection has greatly expanded to include not just the traditional threats like litigation exposure, but effective risk management on all fronts, including cash flow and other solvency-related issues magnified by the economy. We’ve covered many of these issues here including those related to real estate and how it can adversely affect doctors’ financial solvency and the factors that separate those who are surviving from those who are not.
As the end of the year is approaching I’ve been talking to more doctors who are contemplating if and how they can keep their doors open given the fact that their fixed expenses were based on old revenue models that are rapidly evaporating. Decreases in insurance compensation, Medicare contract losses, increasing incursion into nearly every area of practice by hospitals that are sucking up every available insurance contract and pushing doctors that have been successful providers for years into insolvency, the list goes on and on.
The medical business is a microcosm of the larger economy itself and as always, cash flow is king. In our current economy, the lack of cash flow has become all too common to all business owners, including doctors, who were extremely profitable to the tune of six- and seven-figure incomes even only two to three years ago. In those “good old days” when revenue and liquidity were taken for granted, there was little or no thought given to monthly overhead requirements for payroll, vendors, the practice’s rent/lease, or even the commercial mortgage payments on the facility itself. These lease and mortgage obligations are almost always personally guaranteed by one or more of the principal physicians in the practice, so an economy like this one threatens both the viability of the practice itself and the personal solvency of the doctors who own it.
As this economic pressure continues doctors are working hard on ways to diversify their practices, increase marketing and adding new revenue streams, but as we’ve seen with our government, solvency is an issue that needs to be addressed with an eye towards both revenue and spending. Below are some specific actionable tips to consider, which were shared with me by Mark Johnson, a partner with B2b CFO in Phoenix, Ariz., which has helped business owners nationwide with a variety of business and succession-planning issues. Johnson has worked at the CFO level for business in nearly every channel including health care for decades.
1. Do not pay your suppliers until the due dates and, if necessary, go past the due date with the vendor’s concurrence.
2. Accelerate all accounts receivable collections through timely customer follow-ups on past due receivables. Consider something like a discount for cash payments made prior to the due date.
3. Renegotiate lease terms on both rent and equipment when you are in the last two-to-three years of a contract. Lessors would rather keep you in a longer contract at a lower rate than lose you as a client altogether.
4. Utilize outside consultants who work on a contingency basis to lower costs for expenses such as telecom, property, and casualty insurance. These arrangements allow for lower expenses and the savings is usually split with the consultant.
5. Reduce inventory levels and manage work-flow production with a minimum of on-hand product for manufacturing;
6. Research your deposits paid over a year ago to utility companies in order to determine if the deposits are still required; there is a chance they may not be.
7. Defer principal and interest on outstanding loans with banks and other creditors.
Additional assistance and guidance in the area of cash-flow management can be provided by your finance and accounting professional.
Finally, get experienced help. Whether renegotiating your lease, going back to a bank for a loan modification (even interest-rate reductions have been critical to some doctors), or dealing with creditors in a more advanced stage of default, you will almost always have better results when dealing with experienced counsel that knows the law, the players who can depersonalize the situation and present it as a good business decision to the other parties. There are lawyers out there that have extensive experience in this specific area, find one and ask them some qualifying questions on their specific experience and their results in solving a problem like yours.