Before you sell your dental practice, potential buyers look for many things: patient flow, location, and practice performance, to name a few. Perhaps one of the most crucial elements of dental practice value is positive cash flow, which you should be working to maintain as you approach the exit from your practice.
You should aim for cash flow that equals 40 percent or more of total income minus the total cost of operating expenses. Why 40 percent? This is the number that will give you flexibility as you approach your practice sale. If you need to make changes to your practice, like hiring more staff or upgrading older equipment, you need liquidity in your practice.
How to Improve Cash Flow
There are a few areas you can address if you need to improve your practice’s cash flow. We suggest focusing on the following:
Collection Policies
What does your average A/R aging report reveal? If most patients are taking 60-90 days to pay their balance, there is room for improvement. If you don’t already, start accepting credit card payments on your website, and encourage payment at time of service. Stop sending out paper invoices through the mail.
You can also establish an in-house financing plan or membership. Many patients don’t have enough or any dental insurance, and for savvy dentists, this is an opportunity. Your membership plan can be tiered to include basic preventive care all the way to restorative or cosmetic procedures; and this could be a positive selling point to potential buyers.
Reserve Fund
Your cash flow reserves can help you weather downturns in revenue cycles, help pay staff salaries, buy equipment, and invest in marketing. Even if you’re selling, a reserve fund contributes to positive cash flow and increases the book value of your dental practice.
Renegotiate Where You Can
Rent is one of the highest cost centers for dental practices and rent that is more than 5-7 percent of collections is too high. Chances are, you’re locked into a lease contract, but if you can renegotiate, try. You should also look at lab and clinical fees, which shouldn’t be more than 4-6 percent.
Employee Salaries
Competitive wages are important in retaining quality staff, but make sure your salaries and benefits aren’t exceeding 25-27 percent. If your numbers are higher than that, consider restructuring benefits and salaries, and if you’re far enough out from a practice sale, try moving toward a performance-based compensation system.
What causes poor cash flow? These are the top three cost areas:
- High rent
- Inflated salaries
- Debt
If you’re contemplating selling your dental practice and aren’t sure if your current cash flow will meet future requirements or help you increase the value of your sale, contact Ellen Dorner at N/L Transitions today.