Starting a business, any business, carries some degree of risk. Building a healthcare business, a practice, is no different.
You’ve seen the statistics about business startup success, right? According to 2014 data from the Small Business Administration (SBA):
- 66% of small businesses survive past the first two years.
- 50% will make it through the first five years.
- 33% will make it to the 10-year
While these may not be the most glowing statistics, they’re not that terrible either. Everything changes at a rapid pace today, and that includes small business.
So what are the primary reasons for new business failures? Depending on who you talk to, the reasons vary. However, almost always will you find the following two included in the list:
- Lack of Experience and Planning
- Lack of Cash Flow
Lack of Experience and Planning
While most start-up owners have a strong vision and some plan to start their practice, often, plans lack specifics.
When you start a practice, you need to be clear about:
- Who you’re going to work with (your target market)
- How you’re going to attract them to your practice (your marketing)
- What specific services you’re going to offer (your product) and
- How you’re going to price your services (your pricing structure)
Most new business owners, and by default new practice owners don’t have any training in business. Hence most of the above evolve over time and by default. In most cases, everything gets “figured out” as the business is established and grows.
However, small business owners have to wear many hats and pay attention to many things to run their business effectively, particularly when first starting out. It’s easy to forget about or fall behind with different parts of the business, which will haunt them later on.
Unfortunately, there is a steep learning curve when you first start your practice. This may delay progress, hinder stability and growth of the business. And sometimes, a business will get off to such a wrong start, that it’s hard to recover from it altogether.
Lack of Cash Flow
Lack of cash flow is probably the biggest reason for a business to go under. If you don’t have enough cash on hand to pay your monthly obligations, you just can’t stay in business.
To manage your cash flow successfully, it’s important you know your expenses, your income, and to budget accordingly. Budgeting for a new, small practice can be somewhat of a challenge.
There are many expenses that have to be paid… rent, utilities, marketing, technology, office and clinic supplies, and salaries. And let’s not forget about the taxes that need to be paid.
Yet, chances are your income is on a roller coaster. You’re building your practice, and that takes time. While you may be seeing five patients on your first day, you may not have a single patient on your schedule the following day.
Ideally, you created a forecast for your new business. You took the time to build a model projecting how many patients you would need to see to cover x-amount of expenses, over a certain period. Forecasting allows you to prepare for different scenarios as you build and grow your business.
The challenge of cash flow compounds for small practices accepting insurance reimbursements. Typically, your reimbursements will come in weeks after you provided the services… you provide the work today, but get paid tomorrow.
Additionally, a practice owner may run into problems with finding a qualified and reliable billing provider. No matter if you decide to bring your billing in-house or go with an outside company, finding a quality service is not always easy. Yet, to a large degree, the success of your practice depends on it.
But let’s assume, your billing is working fine. You provide the services, they get billed for at once, and you receive reimbursements promptly.
Now it’s up to you to manage the finances of your small practice, and that can be challenging. Many small business owners make the mistake of neglecting their books and default to managing their business from their check book.
The assumption is this: as long as there is enough money in the account, the business must be doing alright. However, your balance will not tell you what you need to pay tomorrow or the day after. Your account balance can be very misleading.
All of the above issues can lead to problems in cash flow and hinder the growth of your business, perhaps even destroy it.
But you don’t have to experience these problems in your new practice. You can sidestep them by educating yourself and knowing what you’re up against, from the get go.
Let’s face it, starting a business can be risky, but there are ways to minimize the risks. Here are some of the things you can do to prepare and limit your exposure:
- Invest adequate time to plan your business. Know what you want to create and why.
- Educate yourself about business. Take a class on the basics of business. Read and learn… it will pay off.
- Prepare financially to start your business. Have a plan B!
- Once you’ve started your business, pay attention to your cash flow…
As always, we’d love to hear from you. Let us know what you think…
By Johanna Hofmann, MBA; regular contributor to the NPBusiness blog and author of “Smart Business Planning for Clinicians.”