Diagnosing cash flow problems in a SNF
Nursing homes operate in a difficult environment where they face constant financial pressures. On the revenues side are payers who are always trying to negotiate lower prices and slower payments. On the expenses side are high debt payments coupled with supplier who want to raise prices, and so on.
Under these conditions, it's easy for nursing home operators who are not scrutinizing their financial statements to encounter cash flow problems. Obviously, these problems are easier to solve if they are caught early – before they develop into a full-blown financial crisis.
For the most part, only a few areas can create cash flow problems. This article helps you diagnose some of the most common sources of problems.
Diagnosis #1: Weak gross margins
The first area to examine is your gross margins. The industry is highly competitive and has tight revenues. To remain competitive, nursing home facilities often try to charge the lowest possible price. Unfortunately, there are times when the price for some services goes below the break-even point. Sometimes these losses are minimal and go undetected for some time. However, their long-term cumulative effects often have dire consequences.
The best way to address this problem is to perform a comprehensive assessment of your costs and revenues. Calculate the fully loaded (all-inclusive) cost to deliver your services, and ensure that your gross margins, at minimum, reflect a small gain.
Diagnosis #2: Too much overhead
Another common problem for nursing facilities is to have too much overhead in relation to the services they provide and revenues they generate. Excess overhead depletes available cash flow and creates financial strains.
Diagnosis #3: Slow collections and bad debt
Cash flow problems commonly originate with collections issues – primarily slow collections and bad debt. Having too much money tied in slow-paying receivables drains your reserves. Bad debt also hurts your financial reserves, but, more importantly, your profits.
Diagnosis #4: Too much inventory
Having too much inventory is a problem often associated with manufacturing companies rather than SNFs. However, SNFs can also have funds tied in excess inventory, although to a much lesser degree.
Diagnosis #5: Low cash reserves
The timing of income and expenses doesn't always match, and there may be times when expenses exceed income. This causes the facility to run out of money. The issue is not profitability. Rather, the nursing home facility does not have reserves sufficient to handle the ebbs and flows of revenues and expenses. This specific issue was covered in a previous article, “Financing an SNF with Cash Flow Problems”.
Diagnosing and solving cash flow problems is seldom easy. Furthermore, these problems can occur in combination, which makes tackling them difficult. If neither your finance department nor management team has direct experience managing cash flow problems, consider retaining external help to diagnose and solve the problem as quickly as possible.
Find a CPA or financial consultant with experience in turnaround management in the healthcare industry. One source of industry professionals, the Turnaround Management Association, has members in every state.
Marco Terry is the founder and managing director of Commercial Capital LLC, a leading provider of medical factoring financing to nursing homes. He can be reached at (877) 300-3258.