The economic news we are being bombarded with each day may cloud the ordinarily clear perspective we have of our industry. One of the topics that has been on TV lately — “recession proof jobs” — has been positive for our industry. Health care-related jobs seem to rank in the top 10 consistently. That is because demand for our products is consistently growing. The needs of people with COPD or cerebral palsy, for example, don't change because of a recession.
We are fortunate to be in an industry that is relatively stable. So if the circumstances around you heighten concern about your business, focus your concern in the right places. Demand should not be the concern; cash flow could be. Cash flow is not profit but the change in a company's cash position from one accounting period to another.
The credit markets and unemployment can cause some disruption in home care companies' cash flow. The risk from the credit markets is that much less is available, and unemployment may reduce the availability of patient payments. The risk from unemployment is somewhat diluted by the percentage of customers who are retirees.
There are six ways to protect cash flow. Within each of them, there may be many actions that your management can take.
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First is the principle of matched funding. Applying this principle means that current liabilities fund current assets, and non-current liabilities fund non-current assets. The ultimate consequence to violation of this rule is a cash flow problem. For a temporary situation, one technique to reduce the risk of a cash flow problem is to negotiate longer trade terms with vendors. But longer terms are essentially meaningless unless your credit limit is also increased.
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Second is management of the “cash conversion cycle” (CCC), which is the average amount of time that a company's cash is tied up in a transaction. CCC equals Days Sales Outstanding plus Inventory Days on Hand minus Payable Days Outstanding. The object is to get the CCC to as small a number as possible — a negative number is even better. The beauty of CCC management is that it covers all operating accounts.
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Managing asset quality is the third principle. Your largest assets are equipment and accounts receivable. Under the circumstances, your focus needs to be on the quality of AR. The solution comes in part from billing and collections and partly sales and marketing.
The billing component is to reduce held revenue and get the invoices out. Not only does that get you paid quicker but it increases the quality of the receivables, especially the patient portions. The sales component is to shift to asking for profitable referrals from sources that yield less patient co-pays or Medicare.
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Strong demand leads to the fourth principle of managing sustainable growth rate (SGR). Because of demand, it is possible to grow at faster rates than can be financed by internally generated capital. Since there is little external capital available, this is a much greater risk. Additionally, the reimbursement cuts that were put in place in January lower the SGR for providers.
Increasing SGR results from higher profit, greater profit retention and faster asset turnover. Once profit retention reaches 100 percent, the next place for our industry to focus is asset turnover.
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The fifth principle for managing cash flow is managing profit. There are two keys to managing profit: One is getting the best customer, not the next customer. Knowing which customer is best or most profitable is not determined by gross profit analysis.
Most of the industry's expenditures are below the gross profit line, which requires activity-based costing at the product-payer level. The other key to managing profit is to manage productivity, which is a high-level measure of how efficient your processes are.
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The final principle is to know the numbers and what drives them. For example, knowing DSO is at a certain value means less than knowing why DSO is what it is. Is it attributable to one really slow payer or a product or a biller? Measure DSO drivers, like DSO by biller, by payer and by product. Then you don't have to take a shotgun approach to managing DSO or any other important metrics.
Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. You can reach him at 321/752-4514 or wweeks@weeksgroup.com.
