Part 11: Ironclad Rules for Protecting Your Clinic's Cash Flow—"Insolvency While Profitable" Is Not Someone Else's Problem. He Who Controls the Flow of Money Controls the Management.
Introduction
It is possible to have "no money" even when you are profitable.
"I am showing a profit on the Profit and Loss (P&L) statement, but for some reason, I don't have enough funds at the end of the month."
This is one of the most frightening scenarios faced by small and medium-sized business owners, not just dental clinics. Have you heard the term "insolvency while profitable"? It is a state where you are making a profit, but your cash on hand is depleted, making it difficult to continue operations. This can happen in clinic management as well.
Profit (a matter of P&L) and cash (the movement of actual money) are two different things. Understanding this difference is the minimum financial sense a manager should possess.
Why does "being profitable but having no money" happen?
The main causes are the following three:
1. The gap in the payment cycle for insurance medical services
Medical fees for insurance-covered treatments are paid two months after the month of treatment. In other words, fees for treatments performed in June are deposited into your account in August. With this two-month time lag, monthly fixed costs continue to be paid in advance.
2. Lump-sum expenditures for capital investment
When you purchase dental chairs, CT scanners, or laser equipment with cash, they are recorded as "depreciation expenses" spread over several years on the P&L, but the actual cash leaves your account in an instant.
3. The pitfall of being too tax-conscious
Driven by the desire to "reduce taxes," some owners increase expenses to compress profits, resulting in the worst-case scenario of "a loss on the books and no cash on hand." Tax planning is important, but protecting your cash flow is the top priority.
Five ironclad rules for protecting cash flow
Rule 1: Maintain "three months' worth of cash on hand"
Always keep three months' worth of fixed costs (rent + personnel expenses + leases, etc.) in your account. This is your clinic's "survival line." During the period of rising utility and commodity prices in 2023–24, the difference between clinics that had this buffer and those that did not was stark.
Rule 2: Borrow not when you are in trouble, but while you have room
Financial institutions are reluctant to approve loan applications once management is already in distress. Securing a line of credit while sales are stable is your preparation for a rainy day.
Rule 3: Use financial institutions for large capital investments
Purchasing with cash may seem like it "avoids interest," but it carries the risk of depleting your cash all at once. Installment payments or leases, which become monthly fixed costs, make it easier to forecast cash flow and protect the clinic's liquidity.
Rule 4: Align the timing of private treatment payments and staff bonuses
If the payment dates for high-cost private treatments (implants, orthodontics) coincide with bonus payment dates, cash flow management becomes easier. Designing payment schedules consciously is also part of a manager's job.
Rule 5: Create one "cash flow statement" every month
A cash flow statement that lists expected income and expenditures for the next month or two is the "weather forecast" for your management. Make it a habit to review this table with your tax accountant every month, not just the P&L.
The Director's Perspective: An era where "patients over numbers" won't protect you
Since 2024, due to the trend of rising interest rates (changes in the Bank of Japan's monetary policy), some clinics are beginning to see an increase in the interest burden on their loans. The era of "if I just focus on treatment, management will take care of itself" is slowly coming to an end. Being conscious of cash flow is also about protecting the stable provision of medical care to your patients.
Today's Action Plan
Reconcile your account balance with this month's planned expenditures today.
Just by knowing "what will be debited at the end of this month," your management sense will change significantly.
Consult your tax accountant on "how to create a cash flow statement."
Aim to have one tool that visualizes the movement of cash, separate from your P&L.
Next time (Part 12), I will explain the timing and criteria for considering incorporation as a medical corporation.