Avoiding Monthly Revenue Peaks and Valleys: Guidelines for New & Existing Practices

New Practices

Most new audiology practices face the dilemma at some point or another of keeping their financial head above water. Articles written about managing practice revenue are helpful when cash flow is available. However, when business cycles are in a decline, the audiologist in a new practice must rely on more creative resources for funding.

Funding is broken down into two areas: (a) startup funding and (b) funding for operations. Startup funding is needed to open the practice. In general, sources include personal savings, interpersonal loans, financing from suppliers, and personal lines of credit. Drawing upon personal credit carries the most risk because credit card advances have steep interest rates, and home equity financing risks are legendary. The use of suppliers (in this case hearing aid companies) has merit, providing the audiologist is aware of the pitfalls. In some cases, manufacturers are able to assist with purchasing equipment. Bank loans may be available through the U.S. Small Business Administration.

For money to keep the practice afloat, financing based upon the value of a large contract may be feasible. For example, the author has a contract to serve the state department of corrections. The contract has value that can be used to convince a lender that the practice should be given a line of credit. Contracts with nursing homes, hospitals and government agencies, providing they are not easily canceled, are valuable assets that can be used to attract cash.

Operating funds may be available from loans based on accounts receivable financing. This is similar to contract financing. The value of the accounts receivable is used as collateral for obtaining cash. Most audiology practices do not have a large accounts receivable base from which to draw. The one exception is accounts receivable from patients for their hearing aids. If a practice has a large number of patients paying monthly, those accounts may be considered as an enticement for a lender to fund the practice.

There has been a recent surge in funding from factoring. Factoring does not consider the value of receivables. Rather, factoring extends credit to the consumer and pays the audiologist directly without having to collect from the patient. The audiologist is paid when the patient's credit is approved, and the hearing aids are delivered. The advantage of using credit companies is that the audiologist does not have to collect from the patient and receives the entire payment upfront, allowing for a positive cash flow. One of the disadvantages of factoring is that the credit company takes a larger percentage of sales as a fee than would be taken if a credit card was used. Advantages to the patient include the ability to pay the balance within the first year at little or no interest, being able to obtain amplification and audiological services on credit, and financing for premium hearing aids that might not be affordable if credit was not available. A stipulation of factoring is that the patient must have good credit.

Another strategy to preserve capital includes leasing equipment. For the audiologist who charges for diagnostic testing, it makes sense not to pay for expensive clinical equipment upfront. While leasing adds to the overall cost, the lessee can pay off equipment on time while generating revenue from its use. In a lease-purchase option, the audiologist buys the equipment for a nominal sum when the lease expires. For example, if an audiometer retails for $6000 and is leased for 36 months, the payout is $166 per month. Add 8% interest and the cost over the life of the lease is only about $475, or $159 a year. If the audiometer generates $95 in revenue per test, the lease would be paid after the 68th test. ($95 X 68 tests= $6460). Most practices can afford to pay $179 per month compared to a cash outlay of $6000.

Strategies to Avoid

There is a temptation to accept all business, whether it is good business or less than profitable. One type of business that has become well publicized is the TPP or Third Party Payer. The ads are enticing. "Join as an affiliate and enjoy the benefits the corporations get without sacrificing your independence!" "Become an affiliate center and take advantage of our exclusive network of insurers!" It was a natural outgrowth of the Internet hearing aid businesses that developed networks with small practices. This time, the reward dangled in front of the audiologist is bigger and so are the risks.

How does it work? First of all, third parties are usually corporations that have a vested interest in the retail market. Some already operate a chain of hearing aid centers, and desire to expand their network without investing in the expansion. Some are owned or promoted by hearing aid companies. The third party negotiates with an insurance company or member organization to give deep discounts to its members if they buy hearing aids from company owned or contracted centers.

Affiliates own their practice with no financial support from the third party, but are contractually required to operate within their policy for setting fees, delivering hearing aids, and after fitting services. These policies requirements often extend up to three years. Small practices have been the target of third parties that want to demonstrate to health insurers that they have a large network to which members are referred.

How does an affiliation affect a small practice? The contract with an affiliate requires the audiologist to sell hearing aids at a deeply discounted price, provide extended warranties and batteries, and up to a 90 day free trial. Until recently, there was no application or annual fee to join as an affiliate, but at least one company's proposal requires a membership fee and annual payment to be part of their network.

Affiliates must abide by the third party's terms when seeing one of their referrals. Services may include testing at no charge (an issue for audiologists who accept Medicare), free service for one year (or longer), allowing the third party access to patients who were referred by them, inclusion of site visits, and patient audits. Almost all have a schedule for hearing aid charges that is not negotiable. Often, the prices are far less than the usual customary and reasonable charges audiologists in private practice use. The discounted prices can reduce the practitioner's profit margin considerably, resulting in a higher break-even point and less profit on the "bottom line."

In addition to lowering profit, the extended free trial results in a negative cash flow because the manufacturer's bill must be paid even if the hearing aids are still on trial. Think about having to refund $4000 in a tight month. What does that do to the profitability of a practice? Some third parties supply the instruments, and send the provider a dispensing fee at the end of the trial period. Even if the TPP buys the hearing aids and pays the audiologist a stipend, it is customary to wait 45-90 days to get paid. For the audiologist in a cash-flow bind, time is money. An excessive amount of cases that take long to pay will add to a poor cash flow.

Before a practitioner enters into an agreement with a third party, they should investigate how the affiliation could end if it does not meet the audiologist's expectations. One example may be the issue of who "owns" the cases and whether or not the audiologist must report patient information to the TPP. Another issue is whether the TPP allows an affiliate to buy from manufacturers not on their approved list.

The private practice audiologist must decide if the strings attached to becoming an affiliate are worth it. If becoming an affiliate with a TPP doesn't increase the bottom line, it might be better to pass on the opportunity.

Another opportunity that might result in more work with less profit is providing services to nursing homes. The delay in receiving payment for nursing home services, coupled with an artificially low reimbursement rate from these payers can result in a negative cash flow—especially when hearing aids must be fitted weeks or months before payment is received.

A new practice should be aware of the need to operate in the black. Simply stated, cash is king and poor cash flow can break a new business. Try to keep as many accounts current as possible. By taking payments before having to pay for the hearing aids, a practice is much more likely to remain solvent. Keeping your financial head above water is not easy, but a good businessperson, just like a good swimmer, is able to make it across the pool by using a little common sense and preserving resources.

Existing Practices

A concern of audiology practice owners is how to avoid exceptionally bad revenue months. Whether they are the result of inclement weather, seasonal tourism, economic changes in a bear market, holidays, or just plain bad luck, most practices suffer from financial peaks and valleys. For the small practice, this can be catastrophic since fixed costs like rent, payroll, insurance, telephone, and taxes are due regardless of the revenue stream.

The best advice anyone can give is to save for a rainy day. However, a few bad months can be disastrous for even the most frugal audiologist. What do other small businesses do in response to revenue fluctuations? The first strategy is to secure a line of credit. Even when the economy is down, lenders will support a practice that is creditworthy. One advantage of becoming a doctor of audiology is that lenders usually look favorably on doctors, especially ones that are in a growing field as evidenced by US News and World Report (Nemko, 2008).

Line of Credit

A secured line of credit may be obtained from a bank by showing that the borrower has sufficient collateral, usually in the form of cash or real estate. Until recently, a line of credit secured as a second mortgage was popular, but as lenders grew wary of lending based on shrinking home equity values, this has tightened up. For exceptional borrowers, an unsecured line of credit may be obtained when the practitioner has a history with the lending institution (and is considered a good credit risk). Borrowing from other resources such as family members or against securities is also possible. The borrower must remember that all loans are payable with interest and some may be called without notice. The line of credit allows the borrower use of cash as needed without having to take it all out at one time.

How much of a line of credit is sufficient? Generally, about three months of expenses should be the minimum requested. In the author's case, the line is $100,000 but has never been used. It is self-renewing with the same bank used for all other business. To calculate three months of expenses, look at all the fixed costs including rent, salaries (but not commissions), taxes, telephone, contractual advertising costs (e.g. Yellow pages, insurance, etc.), and all other expenses that must be paid whether or not the revenue stream is steady. Do not take into account variable expenses such as non-contractual advertising costs, commissions, travel, educational expenses, or any other costs that are not needed for the daily operation of the practice. The line of credit should be used only when it is necessary to keep the practice in the black or when a temporary drop in revenue occurs. In that case, the loan should be repaid quickly.

Other Financial Approaches

What other strategies can be used to keep afloat? One possibility is to allow patients time payments for hearing aids. This is controversial given that most experts advise getting the balance up front. One way to do this is by using credit companies that specialize in funding hearing aids. While this allows patients the opportunity to pay on time, some patients will not qualify based on a credit check. The audiologist pays a fee for the convenience of using a credit company. Patients who have valid credit cards may also be billed a set amount monthly, and the bank service fees may be less than credit companies charge. For the daring audiologist, setting up a monthly payment schedule is possible without going through a third party. This is successful when the patient pays the cost of the hearing aids up front and then is balance billed set monthly payments. In the author's case, 1/3 the purchase price is obtained at delivery, and then the rest is billed in 12 monthly payments at no interest to the patient.

When done correctly with patients who are credit worthy, monthly payments can cover most of the fixed costs of a practice without the angst a fluctuating revenue stream causes the nervous practitioner. There is a risk from the small percentage of patients who might default, and having the services of a good collection agency is helpful. The collection agency should provide the first dunning letter at little or no cost to the audiologist. This works most of the time and avoids litigation. In the author's 25 years, we have gone to court twice. Not a bad track record!

Marketing Strategies to Existing Patients

The goal of any mature practice is to keep patients coming back for service and, hopefully, new instruments. As hearing instrument technology improves, there is an insatiable consumer appetite for information about the newest advances. One method to keep patients informed is by a practice newsletter. Newsletters can be written by the practice owner or purchased. An effective newsletter should be mailed at least quarterly to all patients seen within the past 5-8 years. Articles about new technology, the benefits of binaural amplification, the benefits of real ear measures, and even new diagnostic techniques should be written in an easy-to-read style. Avoid using technical terms and long sentences. Keep the articles short and to the point.

If a newsletter does not fit the practice's marketing style and budget, the practice owner can send out reminders to have patients' hearing aids cleaned and adjusted. For example, a "Summer's Heat & Humidity" special cleaning and adjustment sent out before school begins can attract students who need to have their instruments checked before school starts. All promotional materials should have a charge listed. In the summer special, a charge of $25 includes a listening check, re-tubing, and a three-month supply of batteries. Offers for a spring-cleaning, fall cleaning, and "Hear All the Sounds of the Holidays" round out a comprehensive annual direct-mail campaign to existing patients. The impact of this is to improve cash flow immediately. Some patients may need new instruments. The timely reminder to come in for a cleaning might be enough persuasion, for a patient with an older aid, to replace it.

If the practice is having an anniversary, a good way to bring in existing patients is offering a price rollback anniversary special. Simply stated, the patient would replace the existing hearing aids with new ones at the same price paid for the last pair. Limitations might be set that includes not trading in hearing aids over 6 years old, and not accepting any instruments that were bought through the Internet. Although the audiologist's profit margin might not be as good by selling instruments at the price paid for the previous set, there is an immediate cash flow advantage that offsets any loss of net profit. The price rollback has a benefit that is unlike open house deals, because the patient has a preset idea of how much the hearing aids would cost. It is up to the audiologist to select quality instruments that are better than the technology offered in the previous hearing aids, but that are not so expensive that the profit margin is too low.

Marketing efforts that are expensive should not be considered when cash flow is down. If cash flow is a problem to an existing practice, then spending a lot more money at a time when money is tight can exacerbate the problem. Open houses that include breakfast or lunch at a local restaurant might exceed the marketing budget and yield little or no return.

Summary:

Whether the audiology practice is new or mature, cash flow is the single most important factor that separates a profitable practice from one that is limping along. A simple way to track cash flow is by looking at the bank balance at the beginning and end of each month. If the ending balance is less than the recorded balance at the beginning, the practice is suffering from a negative cash flow and aggressive approaches must be taken to maintain a healthy bottom line.

References:

Caplan, S. (2000). Streetwise Finance and Accounting. Holbrook, MA: Adams Media Corp. 2000

Nemko, M. (2008, December 11). Best careers 2009: Audiology. US News & World Report. Retrieved December 28, 2009, from www.usnews.com