Here’s something nobody tells you when you’re going to open your own medical practice. It’s entirely possible to have a thriving clinic, with a fully booked appointment calendar, and still struggle to make payroll certain weeks. Most insurers take 30 to 90 days to pay following a visit, which can really hurt your cash flow.
What is cash flow in a medical practice? Simply put, it is the lifeblood flowing through your practice. It’s not what you use to scale. It’s what you use to survive.
This article is gonna take a deeper dive into the plain definition of cash flow, particularly when compared to profit. We’re also gonna explore what creates cash flow, what blocks it, and how to avoid common barriers that get in the way of your money.
What Is Cash Flow in a Medical Practice?
Let’s start with the very basics: What is cash flow in a medical practice?
Just like any other type of business, cash flow in a medical practice is the movement of money into and out of the practice over time. More specifically, what actually goes in and out of the bank account.
It’s possible to have either negative or positive cash flow:
- Positive: Your practice’s inflows of cash exceed your outflows
- Negative: Your outflows exceed your inflows.
Negative cash flow is very common in your early years, when you are still making short-term investments or covering startup costs. However, over the long term, it can result in insolvency.
In a medical practice, cash flow is required to cover day-to-day obligations (payroll, rent, supplies, and equipment) and to keep the practice operating between insurance reimbursements.
The monies coming into a medical practice need to be accessible, accountable, and traceable at all times. And the right EHR for cash-based practices can help you do just that!
Cash Flow vs. Revenue vs. Profit: Why the Difference Matters
Remember the scenario we introduced earlier? Vastly profitable, very busy, but unable to make payroll? That is profitable-but-a-cash-for-paradox. And it’s way more common than most people talk about.
We all know that your profit is your revenue (what you’ve billed) minus your expenses (what you pay out in costs). But that’s not what creates cash flow.
For example, let’s say you build $40,000 in the month of March. But you were only able to collect $12,000 of that by the end of the month; everything else is stuck in accounts receivable. That’s how the payroll shortage begins, particularly in the early days.
What Drives Cash Flow in a Medical Practice?
Here’s a look at your probable inflows and outflows:
Cash Inflows
| Category | Examples | Notes |
|---|---|---|
| Patient Revenue | Patient payments, copays | Direct collections at the time of service |
| Insurance Revenue | Insurance reimbursements | Payments received from payers/carriers |
| Recurring Revenue | Membership/subscription fees (DPC) | Predictable monthly cash flow |
| Ancillary Revenue | Ancillary services | Labs, imaging, wellness add-ons, etc. |
| Bundled Revenue | Packages and memberships | Prepaid or bundled service offerings |
Cash Outflows
| Category | Examples | Notes |
|---|---|---|
| Staffing Costs | Payroll and benefits | Typically, the largest operating expense |
| Facility Costs | Rent | Clinic or office space expenses |
| Clinical Supplies | Medical supplies | Consumables and treatment materials |
| Technology Costs | Software / EHR | Practice management and electronic records |
| Equipment Costs | Equipment | Medical devices, maintenance, upgrades |
| Compliance & Protection | Taxes, insurance | Regulatory and risk management expenses |
Understanding Cash Flow Categories
| Cash Flow Category | What It Covers | Simple Explanation |
|---|---|---|
| Operating Cash Flow | Day-to-day business activity | Cash generated or used from running the practice |
| Investing Cash Flow | Long-term assets and investments | Buying equipment, renovations, or other growth investments |
| Financing Cash Flow | Loans and owner/investor activity | Borrowing money, debt payments, or owner distributions |
Why Cash Flow is Critical for Medical Practices
If you frequently find yourself in a cash flow shortfall, you’re not alone. It’s been estimated that nearly 60% of small medical practices face chronic cash flow problems.
But why is cash flow important to a medical practice, in particular? You can make the argument that it is particularly important in the medical sector. All businesses have to make payroll and pay day-to-day expenses, but not all of them have to weather reimbursement delays or survive slow seasons.
Common Cash Flow Problems in Medical Practices
What is the most common reason for cash flow issues in medical practices today?
Without question, the biggest barrier is those slow or denied insurance reimbursements. You could face a 30, 60, or even 90-day lag before being reimbursed, with most sectors struggling with a denial rate of about 10%. You’re also probably struggling with billing and coding errors that lead to your claims getting delayed or rejected.
But that’s not the only barrier. We’re seeing more patient responsibility for high-deductible plans, which is making it harder for you to collect and increasing your bad debt.
Medical practices across North America are also seeing their expenses rising faster than their reimbursement rates, and they’ve never paid more for everything from their employee salaries, supplies, rent, or technology.
A lot of practices are also dealing with seasonal shifts and an uneven patient volume that can lead to lags, or a lot of empty slots on the schedule.
And of course, in the early stages, many medical practices will invest heavily in equipment and technology without a cash buffer or safety net.
This link will give you a good idea of how management software helps solve these problems.
Insurance-Based vs. Cash-Based Practices: A Structural Difference
Here is a table to help you better understand medical practice financial management from a high level.
How to Improve Cash Flow in a Medical Practice
This wouldn’t be a very helpful article if we didn’t explore how to improve cash flow for a medical practice.
Here are the areas you will want to focus on:
- Tighten your revenue cycle management: The more you increase your overall operational efficiency, the more you’re gonna help your cash flow with cleaner claims, faster follow-ups on denials, and fewer days in accounts receivable.
- Collect more at the point of care: This is really one of the more underrated medical practice cash flow management strategies. Simply collect more upfront by verifying patient eligibility, keeping cards on file, and offering online patient payments or flexible payment plans.
- Build a 13-week rolling cash forecast. You can’t manage what you can’t see, and that is especially true in medical practice cash flow management. Forecast ahead so you can see the potential cash crunches coming three or four weeks in advance.
- Follow the right metrics and KPI: We will take a deeper dive into that in the next section.
- Diversify your revenue sources: If you rely less on insurance reimbursement, you can open the doors to things like memberships, ancillary services, telehealth, or tiered packages to free up your cash flow
- Use integrated practice management software: This can help you automate billing, reminders, and reporting.
If you want to get an idea of the ROI from using Cerbo, start by reviewing Cerbo’s pricing options.
Key Cash Flow Metrics to Track
What are the right KPIs to track and the benchmarks to shoot for when it comes to cash management in the healthcare industry?
We suggest shooting for the following:
- Days in accounts receivable: You want to shoot for a target of fewer than 40 days
- Net collection rate: Ideally, you want to be above 95%
- Clean claim rate/1st pass acceptance: This is another metric you would like to see at around 95%
- Operating cash flow and days cash on hand: There’s no universally accepted range. Ask yourself what will give you enough buffer to cover fixed costs during slow periods.
Hitting these thresholds will keep your cash flow at a more comfortable level.
How Cerbo Helps Practices Strengthen Cash Flow
Cerbo is an integrated EHR + practice management platform built for independent, cash-based, DPC, and functional/integrative practices.
We can help you free up cash flow with:
- Online patient payments and cards on file
- Membership/recurring billing and payments
- Eligibility and billing workflows
- Financial reporting/dashboards
“I came from the hospital world and had used multiple EHRs. I knew how important it was to have ePrescribe functionality, a patient portal, fax line, the ability for patients to add their credit cards, patient charts, integrated billing and telemedicine features. Cerbo has it all,” said Dr. Andrea Wadley, 127 Pediatrics.
Want to see what Cerbo can do for you? Talk to our sales team today.
Frequently Asked Questions
What is cash flow in a medical practice in simple terms?
On a very basic level, it is the money you’re seeing coming in versus the money going out. The timing is crucial because money stuck in accounts receivable doesn’t help you pay your bills or your staff today.
In a medical practice, what is cash flow required to do?
In a medical practice, cash flow is required to cover operating obligations (payroll, rent, supplies) between reimbursements.
What is the most common reason for cash flow problems in medical practices?
As we covered earlier in the article, there are a number of reasons. However, the biggest pain point in the medical sector is the 30, 60, or 90-day waiting periods to get reimbursed from insurance companies.
How is cash flow different from profit?
When you tally your appointments compared to your operating expenses for June, you could have the most profitable month in your practice’s history. However, you might be 60 days away from seeing any of that money. You’re profitable, but you have no cash flow.
It is very possible (and very common) to have very little cash on hand, even if your profit margins are dialled.
For a deeper dive into this question, see the section above.
How can a medical practice improve cash flow quickly?
Some of the high-level fixes will take more time and involve you fine-tuning your operational efficiency while reviewing a number of key metrics.
However, if you want to solve your cash flow problem quickly, the fastest solution is to collect more at the point of care. That means setting yourself up to get paid quickly with immediate work, denial, or putting cards on file, or giving patients the opportunity to pay online.
What Can I Do Right Now to Help Medical Cash Flow?
Remember, your cash flow is what keeps your practice open today, whereas your profit is what sets you up to scale in the future.
Cerbo’s integrated EHR plus practice management platform helps you shorten your accounts receivable cycle with online patient payments, cards on file, and the reporting dashboards you need to make high-level decisions.
Want to see what Cerbo can do for you? Book a personalized demo today.
