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Expert’s Guide: All About Cash Flow Management in Healthcare
September 7, 2023
Managing cash flow is an integral part of operational sustainability for businesses in the healthcare sector. With changing regulations from federal, state and local governing bodies, unpredictable payment cycles, and high operational costs, healthcare business finances can be a challenge.
Here are some tips from Quatrro accounting and finance experts on how to keep your healthcare organization thriving by maintaining a healthy cash flow. First, let us dive into why cash flow can be such a challenge.
Challenges for Healthcare Cash Flow Management
The healthcare industry is uniquely complex. Operations depend on different and sometimes unreliable revenue sources, with each having its own set of payment schedules and terms. This diversity, combined with evolving healthcare policies and the breadth of information businesses need to parse contributes to the complexity of cash flow management in healthcare.
One aspect that complicates cash flow in healthcare is the process for insurance claim submission and reimbursement. Healthcare providers have to navigate through an intricate system of insurance claims, which often involves tedious processes and lengthy waiting periods.
Each insurance company has its own rules and policies regarding claim submission. If these rules are not adhered to meticulously, it can result in claim denials and further delayed payments and ultimately impact your financial models projections that are critical in making major decisions.
All this to say, that we intimately understand there can be a considerable lag between when the healthcare service is provided and when payment is received— a gap that can severely strain a healthcare business's cash flow if it is not addressed.
The increase in patient financial responsibility, largely due to high-deductible health plans, introduces another layer of complexity. Patients, being less predictable and reliable than insurance payers, can cause fluctuations in cash flow with delayed or defaulted payments.
What Are the Signs of an Impending Cash Flow Crisis in Healthcare?
In the healthcare industry, recognizing the early warning signs of a cash flow crisis can be the difference between operational success and financial struggle. Let's explore some key indicators that signal a potential cash flow issue:
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Inconsistent Cash PositionAn irregular or unsteady cash position can indicate a problem. If you find it challenging to predict your cash inflows and outflows, it's a sign that your cash flow management might be in trouble. |
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High Account ReceivablesA high number of outstanding patient invoices or increasing days in accounts receivable can be a warning signal. If your healthcare business has to constantly chase down payments, it could lead to a cash flow crunch. |
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Limited GrowthIf your organization's growth rate has stagnated or declined despite favorable market conditions, it might be a result of inadequate cash flow limiting your ability to invest in growth opportunities. |
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Increased Reliance on CreditIf your healthcare business frequently depends on short- term debt to cover operational costs, it's a red flag indicating a potential cash flow issue. |
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Inability to Meet ObligationsDelayed payments to suppliers, creditors, or employees can suggest a strain on your cash flow. |
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No Access to Short-term FinancingA lack of access to quick, short-term finance can turn a temporary cash flow issue into a full-blown crisis. |
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Ineffective Inventory ManagementIn healthcare, too much inventory, particularly of high-cost items like medical equipment and pharmaceuticals, can tie up a significant amount of your working capital. |
By keeping an eye out for these signs, healthcare businesses can identify potential cash flow problems before they escalate, allowing them to proactively address issues and secure their financial stability.
Best Practices for Healthcare Cash Flow Management
Effectively managing cash flow in the healthcare industry requires planning, rigorous execution, and constant monitoring. Let's delve into some of the best practices healthcare businesses should consider:
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Monitor Your ExpensesIt is crucial to have a clear and detailed view of where your money is going. This includes operational costs like salaries, equipment maintenance, inventory, and technology investments. Each expense should be categorized and tracked routinely. Benchmark your spending against other similar healthcare businesses to identify any discrepancies. Every dollar saved from unnecessary expenses can significantly improve your cash flow. |
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Implement Accurate ForecastingAn accurate financial forecast is a powerful tool. Use your organization’s past performance, market data, and benchmarking information to project your cash flow under various scenarios—best-case, worst-case, and expected. A rolling budget based on these forecasts can guide your financial decisions, aid in resource allocation planning, and instill confidence in potential investors or lenders. |
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Optimize Supply ChainsEfficient supply chain management can significantly improve cash flow. Understanding demand fluctuations can help plan production and minimize inventory costs. Identify potential supply chain risks and plan appropriate responses. Negotiate favorable terms with your suppliers—discounts for early payment can free up cash that might otherwise be tied up. |
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Maintain Adequate Working CapitalKeep sufficient liquid assets available to cover day- to-day operational expenses and manage market downturns. This could mean only paying bills on their due date unless early payment discounts are available, or offering incentives for early payments from your own customers to speed up cash inflow. |
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Create an Emergency FundAn emergency fund acts as a financial buffer during slow seasons or unexpected downturns. Strive to have cash reserves that cover between three to six months of operating expenses to ensure your healthcare business can weather a financial storm. |
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Pursue Strategic GrowthRapid expansion can strain your resources and leave your organization without sufficient working capital. Plan for growth, but ensure your business has the financial cushion to support that expansion. |
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Secure Financing Before You Need ItApply for a business line of credit during financially stable times. This puts your healthcare business in a better position to negotiate favorable terms and have a safety net ready when required. |
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Establish Accounts Receivable Policies and ProceduresConsistent policies for issuing invoices and ensuring timely payments are crucial. State your payment terms clearly on every invoice and have a plan for slow-paying customers, ranging from reminders to third-party collections involvement if necessary. Quatrro offers evaluations of yourcurrent policies. |
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Optimize Your Accounts Payable WorkflowAn effective accounts payable workflow ensures timely payment of bills, fostering good relationships with vendors and suppliers. It should prioritize and track invoices, maintain up-to-date supplier information, and have fraud detection measures in place. |
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Conduct Regular Financial AuditsDon’t just wait until a formal audit period – make sure you are conducting regular audits of your accounting records, cash holdings, and financial data ensure you have a clear picture of your finances and can help identify areas for improvement. It also minimizes the potential for fraud and mismanagement to happen along the way. |
QBSS: Transforming Healthcare Cash Flow Management
As a leading tech-enabled outsourcing firm, QBSS is revolutionizing the way healthcare businesses approach their financial management, accounting, and technology services.
Our specialized teams offer highly personalized services, designed to cater to your unique healthcare business needs. We understand the healthcare industry's nuances and our services are designed to address these unique challenges.
QBSS brings an innovative approach to financial management, providing your healthcare business with the robust backbone it needs to grow and succeed. See how we can help youtoday!
