What is
number one way to prevent failure in business? Take a minute to really think about your answer. What comes to mind? Increasing patients or customers served? … Effective marketing? … Location, location, location? … Improving patient or customer care? … Being best in your industry? Although these are all essential aspects of business, answer isn’t any of above. The number one way to prevent business failure is to properly manage your working capital.
To ensure that we’re all on same page, working capital is simply defined as difference between your current assets and current liabilities. If this figure is positive, you have working capital available. This working capital may exist as inventory, accounts receivable, or cash on hand.
Working capital management is a critical management issue for growing businesses or medical practices. Take example of a growing doctor’s office: As expenses rise with patient-load increases, you accrue more outstanding cash, particularly before receiving reimbursement from health insurance payors. At this point, your incoming cash does not nearly offset your costs going out. This may be manageable while you work with payments for past services; however, eventually time lag may become a significant stress-point for your business. By adopting a few working capital management strategies, you can make your assets work for you, without becoming beholden to banks.
Strategy No. 1: Get Paid Now Let’s take a look at most obvious area: accounts receivable. What do your receivables do for you when they are not being paid? While your profit margins may look stellar if you have a lot of orders, you have essentially loaned all of your clients amounts of your invoices—until they decide to pay you. Doctors, in particular, know pain of this situation. Insurance payors are particularly adept at prolonging time for payment; they realize that longer they take to pay, greater their profit margins. Is this just another cost of doing business? Well, not necessarily. Eighty percent of small business owners, medical practitioners, and small hospitals are completely unaware of a resource Fortune 500 companies have used for decades: accounts receivable funding.
Banks often measure accounts receivable at as low as 50 percent of their overall value as collateral for a traditional loan. In accounts receivable funding, however, accounts receivable are calculated at full value. Plus, you accrue no debt for this financing, as you essentially sell your accounts receivable for payment against full value.
Perhaps idea of selling your revenue stream makes you nervous. But consider this: You usually receive 80 percent of entire amount of invoice within one or two days—at least 28 to 118 days sooner than usual. This cash injection allows you to make capital improvements for your business to generate more revenue, leverage cash for discounts on your inventory, cover operating costs, or provide bonuses to your employees, for instance.
As your invoices are paid, your funder will repay other 20 percent, minus negotiated fee (average four to five percent of invoiced amount). Don’t get hung up on “cost” of funding. With proper management of those funds, you will more than make up for fees by investments made in your business. Your day-to-day business costs may stay same, but tremendous increase in incoming cash will enable you to rest easy.
Homework: Review your accounts receivable aging report. Note average payment time from one of your best clients or insurance payors. Assuming payment of 80 percent of invoice value in 48 hours, make a list of ways to use that money for your business:
·Cash discounts on inventory (estimate in dollar amounts). ·Buying or leasing new equipment (anticipated return in additional sales). ·New marketing campaign (anticipated additional revenue).
After you total increased income generated by implementing this strategy, you can easily see real benefit.
Strategy No. 2: Shorten Your Operating Cycle Your operating cycle starts when you take cash out of your account to begin work for a client, and ends day client pays you. If you complete a project on Tuesday, for instance, but do not invoice until following Friday—or even end of month—you lose days of income. Since you need cash in your account—not just in your profit margins—you must minimize time between service rendered and service invoiced.
Homework: Review how long you usually take to invoice a client. If that period of time exceeds a week, have your staff shorten that time. This adjustment will decrease payment time by as much as 25 percent.
