Financial Planning for Private Practice.
Greetings from Xpedient Medical to everyone in our network.
Welcome to the first edition of Xpedient Xpress, our newest initiative to better connect with our partners. With every newsletter, we’ll share some easily digestible, but vital, information that we believe will aid the health and growth of your practice. This edition is the first in a series of newsletters addressing proper financial planning for private practice.
After the whirlwind of COVID-19’s arrival and the discombobulation of life and business as we knew it, individuals and businesses alike have had to examine and re-evaluate their functional strategies. This has been particularly true for private medical practitioners, as hard lockdown stripped away the feasibility of a common operational method – simply taking on more work to increase income. Under normal circumstances, this was a viable method of operation and was largely possible due to South Africa’s imbalance in supply and demand for private medical services, which is contrary to many other professions. Our country’s private medical sector is characterised by a scarcity of specialist practitioners, and particularly, an extreme undersupply of super specialists that we so desperately need. This meant specialists occupied a privileged position, in which they could largely dictate the amount of work they’d take on, and therefore, their produced revenue. While the private medical sector and specialist practices may have, almost by default, enjoyed financial stability prior to COVID-19, lockdown restrictions (such as the hold on elective procedures) highlighted an age-old business affliction. This conundrum exerts severe stress on even those with a high net worth: the problem of being asset-rich, but cash-poor.
What has become clear in the wake of this crisis is that the topic of financial sustainability for private practice requires more attention in everyday operations. Safeguarding this component of practice management is fundamental, and ensures you’re prepared in the face of future black swan events. Many consultants have capitalised on the recent climate of panic to peddle their own strategies, which usually hinge upon singular tactics that they swear by. In the midst of business stress and desperation caused by COVID-19, numerous practitioners have been drawn into hiring such consultants in the hope that their cure-all promises of security from implementing their strategy will ring true. However, the truth of the matter is that any financial advisor worth their salt provides multi-faceted advice that could almost be described as common financial sense. In order to cultivate sustainable financial health in your practice, a lateral approach is imperative. In this series on financial planning, we’ll share five key areas that must be carefully considered to do just this.
Cash Flow and Retirement Planning
While these five pillars of financial planning work in tangent to foster financial health in your practice, it’s necessary to note that each aspect is important in its own right. These five aspects require unique approaches and attention, and it’s our hope that we can disentangle any confusion around these concepts in our newsletter’s first series. We’ll kick off the series by examining the first of the five pillars: managing cash flow and retirement planning.
The importance of proper management of cash flow and retirement planning cannot be overstated! This refers to managing your current cash flow to ensure you’re optimising your cash flow at present, as well as estimating future cash flow to adequately prepare for your retirement. These concepts should be held in mind each and every day of operation in order to futureproof your business and provide a secure financial environment for you, your practice, and your family.
How can you ensure that you’re paying enough attention to cash flow and retirement planning?
Firstly, it’s crucial to prioritise reviewing your practice’s monthly cash flows. In order to assess the monthly influx and outflow of cash, you’ll require accurate and up-to-date reports from your medical billing system for revenue information, and your accounting reports for expense information. Analysing these documents will form the basis of your understanding of cash flow and retirement planning.
Secondly, you should ask key questions. While these questions may seem simple, they’re essential for understanding your practice’s cash flow.
Consider:
• What is my average monthly revenue?• What factors could result in fluctuations of monthly revenue?
• What are my average monthly expenses?
• Which of my expenses are fixed, and which vary from month to month?
• How much money remains once I have paid staff and expenses (e.g., salaries or the bank),
before I have paid myself?
• Approximately how many patients do I need to see to reach breakeven point each month?
• What can I do to see more patients if I have the capacity to do so?
Finally, you should further familiarise yourself with your monthly revenue and cash flow by considering the following aspects:
• What is my collection rate? In other words, what percentage of cash do I receive as compared to the amount I invoice? Ideally, this should be above 95%. If, for example, you invoice R 100 000 per month, but only receive R 85 000 per month, the collection rate is 85%, which is too low.
• On average, how much money do I write off as bad debt? What are the factors contributing to this bad debt?
• DSP status: If designated service provider (DSP) status is important, given my geographical location and patient profile, am I signed into the correct payment arrangements with medical aid providers?
• Staff administration of PMB: How well do my staff navigate prescribed minimum benefit (PMB) accounts and the administration thereof? For example, do they effectively assist patients with authorisation and registration for chronic PMB treatment plans?
• Consumables: What are my profit margins on consumables? Is this margin applied accurately and consistently? What stock controls do I have in place?
• Are there ways for me to safely reduce the cost base for running my practice, without compromising the quality I offer?
Once you’ve determined your net results by collecting the abovementioned data, you’ll be able to ascertain other valuable information. This includes what you’re able to earn on a monthly basis, what you need to save to reinvest in your practice, and, crucially, what you can save for your retirement.
Although these considerations may seem obvious or simplistic, it requires a willingness to invest time into becoming familiar with them. Often, these factors are left to trusted advisors (usually accountants) for guidance. However, most accountants are primarily concerned with providing a compliance service rather than offering advice or maximising value. It’s important to be aware of this and ensure that appropriate attention is paid to these seemingly small matters.
All of the above financial facets form an integral part of optimising cash flow. These are standard considerations for all businesses and should be incorporated into the ethical operation of your practice.
We hope you’ve enjoyed the very first Xpedient Xpress, and the primary instalment of our series on financial planning. We look forward to sending you the second newsletter, which will focus on financial risk management. Until then, we’d love to hear your feedback! Please feel free to contact us on communications@xpedient.co.za with your thoughts or questions on this edition or with suggestions on what you would like to read about in future.
