Managing your working capital is crucial to running a successful small business. This is especially true for home health care agencies and medical equipment companies. Small businesses in these sectors are nearly always faced with the same imbalanced working capital environment caused by slow reimbursements from government and commercial payers. Business owners are faced with the difficulties of providing services or equipment to patients today, paying their staff and covering other expenses now and waiting weeks or months (and in extreme cases, years) to receive reimbursements from payers. This challenging financial situation leads to many business owners in the sector finding their company’s cash flow stretched thin. Fortunately, there are a number of strategies a health care small business can follow to best optimize their working capital.
Working capital is defined as a company’s current assets minus its current liabilities. Current assets include cash and cash equivalents, short-term investments, inventories and accounts receivable. All of these current assets can be easily accessed for a business to make necessary payments or expenditures. For small businesses in the homecare and HME industries, the largest current asset is typically the company’s accounts receivable of payments owed from Medicare, Medicaid, private insurers or patients. As for current liabilities, these include accounts payable, the current portion of long-term debt and unearned revenues. Often health care small businesses have accounts payable as their largest current liability, with amounts due to equipment suppliers or others making up the largest amount. The net of the current assets and liabilities make up a business’s working capital.
Now that we have defined working capital, we will explore a number of strategies successful businesses follow to best optimize their working capital. In general, these fall into a few broad categories explored in detail below, including: managing accounts receivables, payables and inventory and also utilizing financing options to maximize short-term cash availability.
Managing accounts receivable from commercial and government payers is often the most effective working capital strategy in the health care industry. However, waiting on reimbursements from Medicare, Medicaid and private insurance companies can cause businesses to face a cash crunch. Whether you handle your billing internally or outsource to a third-party biller, it is critical to make sure the invoices for your patient services are coded correctly and submitted in their entirety at the earliest possible moment. Any rejections or requests for further information from your payers should be addressed promptly. Training your staff in these areas is critical, and as the business owner you need accurate management reports to identify problems and areas for improvement.
The other large area of accounts receivable for medical businesses is often amounts owed directly by patients. Whether this is a homecare patient’s deductible or co-pay, or an amount owed to an HME company for their products, it can be a significant challenge to collect money due from patients. Best practices include informing the patient at the time of service of their liability and getting patient method of payment details up front. Studies show that if patient payments are not collected in the first 90 days, the chance of collection decreases dramatically. Putting resources into collecting funds from patients can be another key way to improve working capital for a business.
Another area that health care businesses can focus on to improve working capital is managing inventory of supplies such as gloves, syringes and office equipment. With the ever-changing health care landscape, business owners must update their inventory and ensure it does not become outdated. Outdated inventory is less likely to be used by your staff, and eventually must be written off by the firm, decreasing current assets and worsening the working capital burden. By maximizing supply chain management and insisting on a transparent environment throughout the process, firms will find that their working capital situation will, on average, substantially improve.
On the liability side, there are a number of strategies a business owner can utilize to improve his working capital situation. Maximizing use of your accounts payable may help a business manage cash flow with little cost. The easiest way is to delay paying your suppliers until the latest possible date. Many businesses are invoiced on a net 30 basis, meaning payment is due within 30 days. Waiting to make the payment until the latest possible time, the 30th day in this example, conserves cash in the bank and improves a company’s working capital position. If you are able to make an early payment, be sure to ask your suppliers for a discount, as one will often be made available to you. Paying this lower amount keeps cash in your business and available for other purposes. Finally, if your business is in a working cash crunch, you may be able to delay payments to your suppliers past their preferred payment date. If you are a good customer for your suppliers, they often will not charge you a fee for the service.
Finally, it is important to note that cash is king in the working capital world. Maintaining a healthy cash balance in the bank allows companies to expand as they see fit, as well as meet unforeseen obligations as they arise. For some firms, taking on additional funding sources for working capital might be advised. This can be done through a number of different financing vehicles such as a Small Business Administration (SBA) or bank loans, or reaching out to an alternative lending institution. SBA and bank loans have the benefit of being the lowest cost of capital, but both have stringent requirements on borrowers and can take a number of months to complete. Alternative small business lenders can often provide funding to businesses within a few days and can work with a large range of clients, but the cost is often higher for these facilities. An informed business owner must assess all options before taking on additional liabilities and weigh the pros and cons of SBA or bank financing and alternative lenders.
In summary, a health care small business must keep its finances in line if it expects to achieve profitability, and that starts with managing day-to-day working capital needs. You will have to work hard to improve payments from your commercial and government payers, as well as your patients. You will also want to manage your inventory and supplies aggressively and work with your suppliers to optimize your payment terms. Borrowing funds to have additional cash on hand can be a further way to make sure your business does not experience interruption when circumstances occur beyond your control. Working capital concerns can sink a business, but through diligent management of each of the channels discussed, you can achieve the desired results for your business.