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Weathering a Cash-Flow Drought: Tips for Keeping Your Business in the Green by Lance Jacob, EA

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Many times, dentists are so involved in the clinical side of their practice they have no time to monitor their practice’s financial health.

When collections are coming in consistently and cash flow is good, expenses and other financial aspects of running a practice are often an afterthought for many dentists. However, economic downturns and unforeseen events can affect overall production, and cash flow can take a hit. Illness or disability of the main provider, changes to insurance reimbursements, new competition, or loss of an associate will affect every practice at one point or another. Dentists are known for high incomes but even they can expect periods of tight cash flow.

The key to weathering these cash flow droughts and maintaining a healthy practice from a financial aspect is to monitor your sources and uses of cash, while still planning for contingencies. One of the most important keys to good cash flow is to manage your receivables. From an accountant’s point of view, this may seem obvious. Many times, we sit at our planning and practice-management meetings with clients and they tell us how busy they are. They think they may have maxed out from a production standpoint, but there never seems to be enough cash to set aside to fund a pension or build a cushion for emergencies.

When we look at the numbers, we see net production is up but collections have not increased by the same amount—or in some cases, collections have actually decreased. This indicates receivables are not being collected, and therefore not converted into cash. Frequently, this is the cause of a shrinking cash flow. The problem becomes magnified because cash is not coming in but the practice still has to cover operational costs.

Managing the ins and outs
Dentists should think of themselves as being no different from the vendors they pay on an ongoing basis. Most vendors require payment within 30 days. How long would you be able to operate your practice if you didn’t pay your lab or supply bills in a timely manner? Most receivables should be converted into cash within 30 days. Receivables older than 45 days become harder to collect and may ultimately have to be written off. In theory, the net production (gross production less contractual adjustments) of a typical practice is production that is 100 percent collectible. If the collection percentage of net production is lower than 97 percent, you may have a collection problem. The key to remember is that a large receivables balance will not pay the bills unless you collect it.

In addition to managing the inflow of cash, you should also be on top of the outflow. Sources of outflow include operating expenses (practice overhead), debt service (loan payments), and in some cases, withdrawals by owners of the practice. I like to break practice overhead into two pieces: direct expenses (expenses related to the production of dentistry such as lab, supplies, and clinical salaries) and fixed expenses (costs that the practice incurs regardless of whether dentistry is being produced, such as rent, insurance, utilities, telephone, office supplies, etc.).

While there is some flexibility in managing fixed expenses because you have the ability to negotiate lower prices or cut back on what you use, you have to be careful when trying to control direct expenses. You can shop for the lowest prices on dental supplies and lab services, but you have to ask yourself if you are sacrificing quality. Obviously you will wind up spending more on direct expenses if you are using low-cost products or lab services that result in failures or require redone procedures.

Another source of cash outflow is debt service, which is simply the payment of principal and interest on business loans. This outflow can be managed by shopping your interest rate or extending the term, if necessary.

Owner compensation also comes into play as an outflow of cash—for instance, when owners allow their personal cash-flow problems to turn into a problem for the practice’s cash flow. This could happen by withdrawing every dollar out of the practice instead of maintaining a healthy amount of working capital, or that cushion for emergencies.

A byte of good news
The good news is that financial software, such as QuickBooks, makes the job of monitoring your practice’s financial health much easier than it used to be. With the assistance of your accountant, you can set up management reports that allow you to review and understand both the profitability (income minus expenses) of your practice as well as the cash flow (cash in versus cash out, including debt service and owner withdrawals).

By using these reports, you can compare your total overhead and individual expense category percentages against prior years or even against established benchmarks in the industry. Managing your cash flow will allow you to build a reserve which can serve as an insurance policy against those cash-flow droughts that every business experiences.

A policy of planning
In addition to managing cash flow while the practice is operating as normal, dentists (and all business owners) should consider ways to minimize the effects of a practice-altering event that could cause practice profitability and cash flow to decline quickly. For example, what if you became disabled or the practice was damaged by fire or flood? Proper contingencies for these situations will get you through such situations.

Even if you aren’t producing dentistry, your practice will still have fixed costs. While receivables will continue to fund these costs in the short-term, you may need to cover them over a longer period, depending on what caused the interruption in production. In this case you should work with your insurance agent to obtain a business overhead or disability overhead policy. These policies pay benefits that will cover a portion of your overhead expenses while you are out.

In the case of a fire or flood, a business-interruption policy can help to limit the damage done while the practice is unable to function. The availability of a line of credit is also valuable in times of tight cash flow. Remember to always apply for a line of credit before you need it.

Taking the time to manage your practice financially will not only ease cash-flow problems; it also will help you maintain the value of your investment.



Lance Jacob is a principal with Naden/Lean, LLC and joined the firm in 1991. He provides business and individual accounting, consulting and tax services for dentists and other health-care providers.


Dentaltown Magazine
September 2025
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