Prior to the pandemic, most dental practices never really had to worry about cash. In contrast, most entrepreneurial businesses and large businesses worry about cash every day. Dentistry has been the beneficiary of an excellent supply and demand ratio of dentists and patients seeking services, which has allowed most practices to have sufficient cash without tracking their cash reserves.
However, the pandemic hit and for the first time many practices understood the old business adage, “cash is king.” Fortunately, most practices weathered the pandemic well and the pent-up demand upon reopening increased their cash. The lesson about the value of cash now needs to be learned and understood.
The only statistic that really matters regarding the health of a dental practice is cash. At Levin Group, for example, we focus on increasing practice production. But the real question is why? Production indicates the level and performance of the practice, whether the practice is growing or declining. So, why all this focus on production? Because it is really a derivative of how much cash a practice will have. The same is true for collections, overhead, and other statistics. They all reflect how much cash a practice will have.
Here is the overriding point. If a practice has cash, it will be successful. End of story.
Understanding cash and why it is the only important survival statistic that counts is easy, but often misunderstood. Most dentists cannot quickly answer the question on any given day about how much available cash they have. We suggest that every morning a doctor checks the amount of cash the practice has available. Within a few weeks it will tell a story and cycles will emerge.
Keep in mind that in addition to cash, debt must be considered. Many practices have debt: long-term leases and other obligations that they don’t think about when they look at a profit and loss statement for the month. When looking at the monthly profit and loss statement, it doesn’t reflect the real financial picture of the practice because it doesn’t show annual or long-term debt.
The importance of credit
Finally, make sure the practice has a line of credit. You want a line of credit that you can access in the event of an emergency. Thousands of businesses would have survived through the years if they’d simply had better cash planning. They were operated by resolute entrepreneurs and smart people with great products or services, but they still failed. The reason they failed was they simply ran out of cash. I describe an entrepreneur as someone who starts a company and then enters a foot race to see if they can sell their products and services faster than they go through their cash. If they do, they will survive and grow. If they don’t, they will go under.
Due to supply and demand, dentistry has been in a far better position than most other entrepreneurial businesses. However, we have not been successful in anticipating a recession or crisis like the pandemic. Hopefully, we will not have another emergency that comes on out of nowhere for a long time, but if you have cash you won’t have to worry about it.