— By Laura Maguire
Before you employ a clinician or bring on a contractor, your practice needs a decent cash reserve.
You need enough cash to pay your team and cover your running costs while you wait to be paid for the work they deliver. You also need to put money aside for your monthly or quarterly BAS rather than relying on the next round of payments to cover it.
Having money in the bank does not always mean it is available to spend. Some of it may already be owed to clinicians, suppliers or the ATO.
Understanding this before you hire will help you work out whether your practice can afford another clinician and how quickly you can safely grow.
The basic problem
You may need to pay a clinician before you have been paid for their work.
For example, a clinician delivers $10,000 worth of services during the month. You need to pay them $7,000, but only $2,000 of their billings has reached your account.
The work may be profitable overall, but your practice still needs enough cash to cover the gap.
The more clinicians you bring on, the larger that gap can become.
This is known as overtrading. It happens when a business grows faster than its available cash can support.
Profit and cash are not the same thing
Profit tells you whether the work is financially worthwhile.
Cash flow tells you whether the money will be available when you need to pay employees, contractors, rent, software, tax and other expenses.
A practice can have:
Full diaries
A growing waitlist
New clinicians joining the team
Increasing monthly revenue
A healthy profit margin
And still struggle to pay its bills on time.
It may simply be that money is leaving the account before the revenue from that work has arrived.
Three numbers every practice owner should know
1. What does each clinician really cost?
Start by working out how much of the revenue generated by a clinician goes towards paying that clinician.
As a general guide:
Total employee costs often sit between 45% and 55% of the revenue the clinician generates.
Contractor payments commonly sit between 60% and 70% of collected revenue.
These are general benchmarks, not rules. What is sustainable for your practice will depend on your pricing, overheads, utilisation and service model.
Include all direct costs, such as wages or contractor payments, super where applicable, leave and other employment costs.
Then ask:
For every $100 this clinician generates, how much stays in the business?
What remains needs to cover administration, systems, insurance, marketing, rent, software seats, tax and profit.
The less you retain from every $100, the more carefully you need to manage your hiring pace and cash reserve.
2. How long does it take to be paid?
Many practice owners know their payment terms but do not know how many days pass between an appointment and the payment reaching their bank account.
That is the number that matters.
The total delay may include:
Time between the appointment and completing the clinical notes
Time before the invoice or claim is submitted
Time spent correcting rejected claims
The payer’s processing time
Time spent following up unpaid invoices
To understand your cash cycle, choose a sample of recent appointments and compare the appointment date with the date the payment cleared your account.
You might discover that invoices with 14 day payment terms are taking 30, 45 or even 60 days to become cash.
The longer this takes, the more of the practice’s money is tied up in work that has already been delivered.
3. How much cash do you need before hiring?
Every new clinician increases the amount your practice needs to pay each month.
Employees are paid from their first day, even while their caseload is still growing. It may take several months for a new employee to reach their expected billable hours.
Contractor costs usually move more closely with the work delivered, but a cash flow gap can still arise if the contractor needs to be paid before the related invoices have been collected.
Before hiring, ask:
What will this clinician cost each month?
How long will it take to build their caseload?
When will they need to be paid?
When will the money from their work reach our account?
How much cash will we need to cover the gap?
Will we still have enough to pay our next BAS?
This does not mean you should avoid hiring. It means your hiring pace needs to match the cash available in the business.
One of the easiest improvements you can make
Look at how often your practice submits invoices and claims.
If claims are submitted monthly, revenue from an appointment completed at the beginning of the month may already be several weeks old before anyone asks for payment.
Moving from monthly or weekly to daily invoicing can bring money into the business sooner.
Also look at:
How quickly clinicians complete their report writing
Whether unpaid invoices are followed up consistently
Which plan managers regularly pay late
Whether your service agreements clearly set out payment terms
Small administrative delays can create a significant cash flow problem as the practice grows.
How much should you keep in reserve?
There is no single amount that will suit every practice. Your cash reserve should be based on your running costs, payment delays and planned hiring.
As a starting point, consider how much you would need to cover at least a fortnight of clinician payments and other operating expenses.
Money collected for PAYG, super and other ATO obligations should be kept separate from your operating cash. Your monthly or quarterly BAS still needs to be paid, even if participant invoices are late or your bank balance is lower than expected.
Your reserve also needs to grow with the practice. The amount that felt comfortable with three clinicians may not be enough when you have six.
A note about payroll tax
As your practice grows, ask your accountant whether contractor payments could be included as wages for payroll tax purposes.
The rules differ between states and depend on how your contractor arrangements are structured. It is much better to understand your potential obligations early than to receive an unexpected bill later.
Before you hire your next clinician
Make sure you can answer these questions:
What will the clinician really cost?
How much will the practice keep from every $100 they generate?
How long does it take their work to become cash?
When will they need to be paid?
How long will it take to build their caseload?
How much cash should the practice keep in reserve?
Is the money for the next BAS already set aside?
Can the remaining cash support another hire?
You do not need to be a financial expert. You just need a clear view of what is coming in, what is going out and when each payment will happen.
This is the business knowledge clinicians are not taught at university, but understanding it can help you grow without placing unnecessary pressure on yourself or the practice.
Find your numbers
My Overtrading Check helps you estimate:
The gap between paying clinicians and being paid for their work
What your practice keeps from every $100 billed
The hiring pace your available cash may be able to support
It takes about two minutes and there is nothing to sign up for. It's free.
This is general information only and is not financial, tax or legal advice. Benchmark ranges are general guides. Your sustainable ratio will depend on your pricing, utilisation, overheads and service model. Superannuation and payroll tax obligations depend on your circumstances and location, so check your position with your accountant.