FINANCE: Keep Cash Flowing

February 1, 2006

It's a classicl problem for practices: How can you manage cash flow so that you're able to run your practice while waiting to get paid? Senior Editor Pamela Moore, PhD, explains.


Cash flow - typically cash coming in exceeds cash going out - is a built-in problem for every physician practice. Simply put, if you see a patient today, you might not get paid for that service for another 45, even 90 or 120 days. But you’ll have to cover payroll in 15 days and pay your rent in 30 days. Annually, things should work out, but at the end of a given month, how sure are you that you’ll be able to meet payroll or take out your own full draw? 

"Physicians are notorious for thinking that the money appears when a service is provided,” says Thomas Hajny, president of Accelerated Receivables Management, Scottsdale, Ariz., and author of Looking for the Cashcow. “There are actually so many critical points that have to be functioning…to move from service to…cash.”

“One of the biggest issues is that people tend not to focus on cash flow until it’s too late,” says Kenneth Hertz, a senior consultant with MGMA Health Care Consulting Services based in Alexandria, La. “What we find when we take our eye off the ball is that the accounts payable balance seems to mysteriously grow - we can’t pay your bills. That then creates a situation where vendors get unhappy. Then you’ve got a problem, too, depending on how physicians compensation plans are set up.”

Hertz notes that “the only thing that goes on with great predictability are the expenses. Your expenses happen day in and day out no matter what. That’s the outflow. The inflow doesn’t. While you have some control over it, you don’t have ultimate control over it.”

Solutions? Set up a budget, track key indicators, and speed up your payments as much as possible.

Budget For Practice, Yourself

“Practices really need to look at developing a cash flow budget,” advises Hertz. Look very broadly at how much money you can expect to pull in and how much you’ll have pay out each month of 2006.

“Over the course of the year, look at what you think you would expect in inflow from your operations. ...” Base that on “when the money will come in, not when you see patients or do a surgery. If you know there is a lag time of 45 days to get paid, build that in. Start with some basic assumptions - days in A/R [accounts receivable] are typically 53 days, we have a net collections rate of X… You want to be able to broadly be able to say where am I going to get my cash from, including operations, investments, and financing.”

Similarly, look at broad categories of expenses such as occupancy costs and staff-related expenses.

Consider modeling your budget categories after those already created by organizations such as MGMA or the National Association of Healthcare Consultants. That will help you make sure you aren’t missing anything, and also allow you to compare your expenses to national norms.

Common cash flow hurdles

When budgeting, be sure to include blips you can plan around or that will require adjustments when they happen. These commonly cause interruptions to cash flow:

Capital investments - Plan ahead for investments you’ll want to make in 2006. For example, if you want to purchase new medical equipment in July, you may want to reduce your paycheck for March through June to help cover the costs.

Early year depression - Expect an income slow down in February, March, and even April. “January is copay/deductible season. A lot of practices that don’t really pay attention to deductibles will see cash flow problems in February, March because the EOBs come back saying the patient owes the deductible,” explains Keith Borglum, a consultant with Professional Management & Marketing in Santa Rosa, Calif. In other words, when you bill for a patient you see in January, you are less likely to get paid. After 30 days go by, you’ll realize you need to bill the patient, which can easily take another 60 days, if you ever collect at all. Plus, with higher copays and deductibles these days, patients cracking into new plans may be less willing to make an appointment in the first place.

Personal expenses - “The other big variable is the physician’s lifestyle,” says Hertz. Big trips, private school enrollment fees and the like can make a physician want to take a larger than usual draw at the end of a given month. “In smaller practices, physicians view that practice as theirs and as kind of their bank account. They need to view it as a business they own and they need to understand what their responsibilities are as a business owner,” Hertz argues.


In short, it’ll make life much easier if you plan for your personal expenses by saving from your regular draw over time, rather than hitting up the practice funds every time something comes up. Set up a personal budget and stick to it.

“One of my most heartfelt recommendations to young physicians is that before they begin their first day of practice to have a financial plan in place prepared by a personal financial planner that they and their family can live with. It will make their years of practice much more pleasurable,” Hertz offers.

Specialty swings - Some specialties have seasonal variations in their incomes. “For allergy, ENT and pulmonology practices, spring is the big season. It’s just like retailers who may do 50 percent of all their sales in November/December,” says Borglum referring to an increase of patients driven by allergy season. Similarly, pediatricians have a rush in the fall with back to school visits, flu shots, and a glut of kids suddenly exposed to coughs and runny noses back in day care. Surgeries slow down in November and December; patients typically delay elective surgery so they can recover after the holidays. Examine your historical trends to plan ahead.

Tax time - Plan for quarterly and bi-annual expenses, whether they are your quarterly contribution to staff taxes or malpractice payments. It may be easier to set aside money for such things each month rather than to have a big dent in any given month.

Length of the month - Borglum worked with one practice that was very concerned by a $10,000 “loss” in November, and suspected someone was embezzling funds. By doing a line item review, Borglum immediately saw that, in fact, the loss came because November that year happened to have three paydays instead of two. If staff is paid every two weeks, most months you only have to pay twice, but some months payroll will be due three times. Don’t be surprised when this happens.

Staff changes - Adjust your budget if you change billing services or have turnover among your billing staff. “I just yesterday came from a practice that … when the outside billing person came in to grab claims, she also grabbed a bunch of new patient registration forms that hadn’t been processed,” shares Borglum. The new billing staff person didn’t immediately recognize her mistake and it created a significant loss in revenue; no new patients were being registered. The practice only caught on when staff realized that patients coming in for follow up appointments weren’t already in the computer. Similarly, new internal staff may take a while to get up to speed.

Natural interruptions - Also recast your budget if natural events require it. “For instance, when Hurricane Katrina ripped through the gulf coast here, I sent out an e-mail saying ‘Look, this is going to shut down…insurance company payment distribution systems so you should immediately put in place a line of credit, if you do not already have one. You should immediately squirrel away some money because you will immediately have a delay from insurance companies, mail delivery, checks that were sitting in New Orleans somewhere. All of those things will have some impact,’” says Hertz. “In fact, there was a noticeable slow down in payments… That is what our job is…to anticipate and have contingency plans in place to be at the ready.”

Speed up collections

Planning definitely will help your cash flow. The other major factor is simply to collect faster. If inflow keeps pace with outflow, you don’t have a problem. To speed up collections, consider:

  • Collecting all copays, surgical prepayments, and as many deductibles as possible at the time of service. Accept no excuses from patients or staff, who should be trained to be appropriately aggressive. Use payer Websites or other technologies to ease verification and to check the copay amount. For example, check out www.availity.com or www.medcomusa.com. Hertz watched one inventive staff member at a surgical practice start to collect about $10,000 to $12,000 a month in pre-surgical payments from patients. “That is money that she …collects up front. That helps cash flow because it’s money you know you’ve got coming in.”

  • Using electronic submission and remittance. Using claim-scrubbing software to correct errors in coding and compliance with LMRP and CCI edits before claims get sent out. Clean claims get paid faster - and you don’t have to wait around to appeal needless denials.

  • Reducing the patient collection cycle. Send patients only three requests for payment - not twenty. If they have not paid or set up a payment plan by then, follow through on sending them to collections.

  • Reviewing all payer communications. Make sure someone is paying attention to reports from payers on claims that were not successfully submitted or were immediately denied. Speed up the resubmission and appeal process.

This article originally appeared in the February 2006 issue of

Physicians Practice.