By Kim Fernandez

For most professionals, stowing away a bit of each paycheck for retirement has become second nature. From 401(k) plans to investing in stocks, the importance of stashing away a healthy cushion for our golden years seems to be pounded into our heads from the moment we step into our first professional office.

But what about a cushion for the business itself?

Financial advisors say it’s a good idea. They offer practical ways O&P practitioners can follow the lead of other businesses and develop concrete plans to ensure the health and success of their own finances and those of their businesses. Most suggest O&P business owners get into the habit of tracking their income and expenses, setting short- and long-term financial goals, and putting a percentage of overall income into a reserve fund.

Practitioners, however, say it’s not all that easy. For one thing, business can ebb and flow, making monthly projections and annual goals difficult to pinpoint. Medicare and insurance reimbursements are in a state of constant flux, with the threat of decreasing reimbursements always present. On top of all this, insurance companies continue to ask for discounts.

With all those challenges, figuring out what a practice will need for long-term financial security can be difficult. And let’s face it—most practitioners go into the business to treat patients and help people, not pore over spreadsheets.

But those challenges, say experts, are the exact reasons business owners and managers need to take a hard look at their potential for short- and long-term cash flow success. Paying the bills every month with a little bit left over isn’t enough anymore.

The O&P Almanac explains why your practice would benefit from examining your cash flow—and offers practical steps to do so.

Why cash flow matters
“Cash flow can be a real challenge,” says James W. Liston, CP, FAAOP, president of Specialized Prosthetic and Orthotic Technologies in Salt Lake City, Utah. “All of that time we spend with a patient, appointment by appointment, may not be reimbursed.”

Because O&P practitioners don’t bill for their time, but only for an end product, it can take many office visits over multiple months before a device is completed, delivered and finally eligible to be billed.

In addition, the threat of Medicare reimbursement reductions and the continued trend toward private insurance discounting means O&P practitioners could soon need to fit more devices than ever to make ends meet.

Rhonda Turner, president of The Prosthetic Center in Houston, Tex., says that even five years ago, her company didn’t spend a lot of time worrying about cash flow outside of making payroll and stashing away the leftover income each month. But the way she does business has changed as industry trends have come into play.

More frequent audits, reimbursement holdups, and more attention to paperwork take valuable staff resources, says Turner. When staff are working on these kinds of back-office tasks, they’re not working with patients, and that can mean fewer products out the door.

“We always need a cushion at this point, and we’re working hard to develop that cushion. As Medicare requirements change, we’re going to need to look at how we do business and we’re going to have to do it in a more structured way,” she says.

Kathy Dodson, senior director of government affairs at AOPA, agrees. “For example, Medicare put a temporary hold on paying claims for nine days at the end of September,” she says. “That probably hurt some of our folks who operate pretty tightly. Practices need to stay on top of it and have someone actively monitoring all of their outstanding claims.”

The danger of discounts
Another thing to stay on top of, Dodson says, is the frequent practice of discounting to insurance companies to secure contracts. The practice, she says, has become so common as to be almost expected—practitioners provide devices to insurance companies at a rate below the usual; in return, they get more business from those companies via a contract agreement.

But that could be a big problem. From time to time, Congress has considered legislation that would allow Medicare to look at managed care contracts when setting usual charge amounts for devices. If those contracts consistently include discounts, that could ultimately lower Medicare reimbursements for everyone.

“That [legislation] hasn’t passed, but the idea has never really gone away,” says Dodson. “The idea of calculating usual charge based on any charge you make will resurface.

“Facilities are fearful that if they don’t get insurance contracts at a discount, they’ll lose the business,” she continues. “So it’s important to really understand the financial situation as well. If they accept contracts at a significant discount, there will come a time when they’re losing money.”

That’s because the total cost of each device produced in a practice includes practitioner time, administrative time and materials. “There’s a misconception that [prostheses] cost so much,” Liston says. “But when we track it and look back on all the time involved, they’re very expensive to produce.”

That financial information is vital to understanding why providing discounts is dangerous. “It’s a naive approach,” Liston says. “Often, we don’t have all the information necessary and we accept that lower contract, and then after the fact realize we can’t deliver care at that rate.”

Turner agrees. “Insurance companies will always ask for a greater and greater and greater discount,” she says. “It will eventually affect whether many smaller companies can do business. If insurance companies are forcing discounts, we’re doing business at a loss. And as much as we’re in the business of helping people, we’re also in business.”

And that, practitioners say, is probably the number-one thing to remember to ensure financial health. Tom DiBello, CO, FAAOP, of Dynamic Orthotics & Prosthetics in Houston, Texas and a member of the AOPA board of directors, agrees. “You must be sure that you are going to be able to effectively support your overhead and expenses and all of your costs and still maintain an adequate and appropriate profit.”

Track your cash
Experts say that practitioners starting to plan for the future should begin with a simple step: tracking income and expenses in some format that makes sense to them and gives a clear overall picture of how the business is faring.

Mary Durie, CFP, of Quest Capital Management Inc. in Dallas, advises her clients to set up a spreadsheet or chart that monitors new business each month.

“I have practitioners build a tracking system,” she says. “It tells them how many new patients they saw, how many prosthetic devices they produced, and how many devices were in process in a month. Knowing these different stages is the first step in predicting cash flow. The next step is managing that flow.”

Because it typically takes about 60 to 90 days to receive payment once an invoice goes to Medicare or insurance, Durie says the monthly spreadsheet can help practitioners predict actual cash flow for the next two months.

“We ask people to start keeping track not of their deposits and expenses, but of their workload—of the billable work that they’re doing. They know if they do a lot of work in August, they’ll have a good cash flow month in November—there will be cash coming in the door,” she says. “If they have a slow September, they know December is going to be a bad month. By simply tracking the billable work they do, they can be prepared for what they need to plan for future months.”

Liston has a similar system worked out in his office, and hosts a weekly “works in progress” (WIP) meeting with his staff to further track billable work. His company has identified the steps, from preauthorization to casting to alignment to final adjustment and delivery, that are tracked week by week. This presents both an accurate picture of workload and potential for cash flow and ensures that no patients fall between the cracks before their devices are delivered and billed.

“All of a sudden, you get to a point where you’re wondering what happened to Mrs. Jones,” he says. “You send her out on a trial system and never hear back from her, and you’ve got this time and money invested in her. If you don’t get her back and get that device finished and billed, that can kill your cash flow.” After his weekly WIP meetings, staff can easily call and follow up with patients who aren’t on course for delivery.

That, says Durie, is a great program for maximizing cash flow. “It’s a great idea to track the patients you’re seeing versus just how many devices you’re delivering,” she says. “Every patient is so different—one might take three visits and another might take eight. If you know where each patient is in the process, you can more accurately predict what your cash flow is going to be.”

Plan for the year
Tracking cash flow is the first step toward being able to plan a financial year, from income to expenses. Once practitioners have tracked a few months, they can use those charts to calculate averages and predictions for individual months and for a full year. By combining that knowledge with the predicted income they get by looking 60 to 90 days out from monthly billings, they can then plan out annual expeditures.

“If you have a good August, you know to wait until November to buy new equipment,” Durie explains. “You have a lead-in of knowing what cash flow will be. If you have a bad production month in September, you know you need to rathole money away to carry you through December.”

After practitioners figure out average income and expenses, they can put together a plan for setting some money aside for the future of the business.

That’s what Turner does. She started tracking all of this about five years ago, and now knows that she can stash away a percentage of her gross earnings without a negative impact on immediate cash flow.

“I have a policy of putting about two percent of every payment into that cushion fund regardless of what happens,” she says. “It’s the easiest way I’ve found to handle it.” It’s also allowed her to put a financial cushion under the business that provides a little insurance when unforeseen circumstances lower monthly cash flow.

Plan to expand
But most business owners don’t want their practice to just survive the year—they want it to grow. Liston sets short- and long-term financial goals. “When you write something down, oftentimes it comes to fruition,” he says.

Strategic advisor Paul Martin, of Martin Acquisitions Group in Mt. Laurel, N.J., says that setting goals is critical. He goes one step farther and advocates letting employees know the specific financial goals of the business.

Many business owners don’t want their employees knowing how much they make, Martin says, but that is counterproductive. “These professionals don’t generally make enough money to be embarrassed about, and usually what employees surmise in their minds is way more than they’re actually making. If they share the data, operationally and financially, employees will believe their contributions are really of value,” he says. Martin also recommends annual strategic planning sessions, especially for businesses set up as partnerships.

Liston began sharing his goals with his staff a few years ago, and says it’s made a big difference in reaching the goals each year. “If you bring other people on board with what you want to accomplish, they’re focused and they have a goal and they’re on the same page with you,” he says.

The lesson has been a good one, he says. “Those of us in this business who are small independents,” he says, “we’re wearing so many hats—seeing patients and filling out forms and doing everything else. Often, the last thing we make time for is planning. If we’re making payroll and paying our bills, we might take our eye off the ball longer-term.”

Kim Fernandez is a freelance writer based in Bethesda, Md.