When a medical practice is profitable on paper but short on cash, we need to explain the gap before changing the clinical team. A positive income statement does not mean every dollar is available for payroll, owner distributions or another location. Collections, debt principal, taxes, equipment and compensation timing can all change what remains in the bank.
We improve medical practice cash flow by following the money from care delivered to cash retained, then attaching a decision to each pressure point. The objective is not to squeeze patient care into a financial target. It is to stop funding commitments that the collection and operating plan cannot yet support.
In This Article
- Key Takeaways
- Reconcile Profit to Available Cash
- Separate Timing From Operating Problems
- Review Compensation and Distributions
- Turn the Findings Into Weekly Actions
- FAQs
Key Takeaways
- Profit is not a distribution policy. We check cash obligations and the forward plan before releasing funds.
- Revenue growth can increase cash needs. A larger receivables balance can represent care already delivered but not yet paid for.
- A collection delay and an unprofitable service need different responses. We separate them before making staffing decisions.
- The fix needs operational owners. Finance, billing and clinical leadership each need a specific weekly action.
Reconcile Profit to Available Cash
We begin with reconciled financial statements and confirm the accounting method. An accrual income statement can include earned revenue awaiting collection and expenses awaiting payment. A cash-basis statement answers a different question, but it still does not make equipment purchases, loan principal or owner distributions disappear from the bank.
Here is a simplified illustrative accrual example, not a client case or benchmark. A practice reports $60,000 of monthly profit. During that month, receivables rise $35,000, debt principal payments total $15,000, equipment purchases use $20,000 and owner distributions use $25,000.
Starting with $60,000 profit and subtracting those four items produces a $35,000 cash decrease. Beginning cash of $140,000 therefore becomes $105,000. This simplified bridge assumes no depreciation, unpaid-expense changes, new borrowing or other adjustments. In a real review, we reconcile every difference rather than force the bank balance into this example.
The equipment and distributions may have been deliberate choices. The problem is approving them without seeing their combined effect alongside the next payroll, debt and tax dates. Profit told us something useful. It did not authorize every cash commitment.
Separate Timing From Operating Problems
We sort cash pressure into three categories: money earned but not collected, operations that do not produce the expected contribution, and financing or ownership decisions outside routine operating expense.
For delayed collections, we review days in accounts receivable alongside the actual aging, payer, denial reason and patient balances. An average can hide a small, old queue that needs attention or a recent service mix change. We compare the practice's own history and specialty circumstances rather than declare one AR figure right for PT, functional medicine and ABA alike.
For operating performance, we connect the practice management system to the financial statements. We examine completed visits or clinically appropriate service units, provider availability, authorization limits where applicable, documentation and the collected amount associated with that care. We do not assume one specialty's productivity measure transfers to another.
Illustrative sensitivity check: if 100 additional completed visits ultimately produce $90 collected per visit, they represent $9,000 of collections before the costs of delivering them. If those visits require $11,000 of additional clinical and support cost, more activity does not solve the problem. If the visits fit safely within already staffed capacity, the financial result is different. We model the actual incremental costs and payment timing before choosing the response.
| Item | Amount |
|---|---|
| Additional completed visits | 100 |
| Collected per visit | $90 |
| Added collections | $9,000 |
| Added clinical and support cost | $11,000 |
| Result before payment timing | -$2,000 |
Review Compensation and Distributions
We separate owner compensation for clinical or leadership work from ownership distributions. We also distinguish fixed compensation, production incentives and bonuses. Each follows a different decision rule; none should be hidden in a catch-all explanation that payroll is too high.
We review when an incentive is earned, when it is paid and whether it is tied to billed production, completed care or collected revenue. Those are not interchangeable. Any change to compensation arrangements needs appropriate contractual, employment and compliance review. A cash forecast is not permission to change an agreement unilaterally.
For distributions, we establish a forward-looking approval rule: forecast the coming obligations, set a practice-specific cash floor and release funds only when the plan remains funded. We coordinate tax reserves and payment dates with the tax adviser, since entity structure and owner circumstances affect the answer.
For multiple locations, we look beneath the consolidated result. A mature site can fund a new site's ramp without that transfer being obvious in a combined bank balance. We show the subsidy explicitly, attach a time limit and identify who can authorize more funding. A profitable location should not become an unlimited source of rescue cash.
Turn the Findings Into Weekly Actions
We use a short weekly meeting rather than wait for month-end surprises. Clinical leadership explains capacity and care delivery. Billing explains claims and collections. Finance explains the forecast, debt and planned cash uses. The owner decides the trade-offs.
| Role | Explains in the weekly meeting |
|---|---|
| Clinical leadership | Capacity and care delivery |
| Billing | Claims and collections |
| Finance | The forecast, debt and planned cash uses |
| Owner | Decides the trade-offs |
A useful action list is specific:
- Billing lead: resolve the largest actionable collection exceptions, with expected next steps and dates rather than unsupported promises of payment.
- Clinical lead: explain the gap between planned and completed care, including access, cancellations, staffing and documentation obstacles.
- Finance lead: refresh the rolling cash forecast and reconcile actual deposits and payments to last week's plan.
- Owner: approve, stage or defer discretionary commitments using the updated cash position.
We pair this weekly rhythm with a timely monthly close. The close confirms the result; the weekly measures let us respond while the operating issue is still fixable. A recurring forecast miss is a signal to change an assumption, not copy it into the next week.
FAQs
Should we cut clinicians when cash is tight?
Not as an automatic first response. We first distinguish collection delays, available capacity, service economics and nonoperating cash uses. Cutting capacity can worsen cash if it reduces appropriate care and collections without addressing the original issue.
Is borrowing always the wrong answer?
No. Financing can support a defined timing gap or investment. We need a repayment plan and a scenario showing what happens if collections or the ramp are slower. Borrowing should not substitute for understanding a recurring operating deficit.
Which report explains where the cash went?
We use a profit-to-cash reconciliation, supporting receivables and payment detail, and a forward cash forecast together. No single report explains past movement and future obligations equally well.
Final Thoughts
The decision this week is not simply spend less. We identify the largest cause of the profit-to-cash gap, assign an owner and change one commitment or operating process before the next cash pinch. Then we measure whether that action changed the forecast.
Schedule a financial strategy call to work through the cash decisions facing the practice. For related reading, see What Is a Fractional CFO for a Medical Practice, and Do You Actually Need One?.
