As you know I talk a lot about how to manage money. I also talk about how I manage my own and my business money.
But business money management is an art. Even magic. To some it is like Harry Potter’s wand. To some the magic never works (Ron Weasley) and to others they are just a natural at it (Hermione Granger).
But I think that is because the focus is all wrong. I often get a practice owner or contractor who is about to start a business. They spend ages and spend serious dollars designing logos, websites and socials.
Then for some reason almost everyone will convince me that they need a new car for their business. Not an ordinary one either. It usually must show some kind of status.
Now don’t get me wrong. I am lover of fancy cars and just recently purchased another to be added to my collection but let’s be honest. I don’t have to have one for my business no matter how much I convince myself that I do.
So, my advice to new start up medical professionals and existing owners is simple. Keep everything simple.
Find out what makes a business fail and then do exactly the opposite.
Medical practices fail or struggle because they run out of money or cashflow is tight.
So here are the biggest things that will knock your cashflow and ability to trade.
1. Taxes!
Every quarter I will have the same conversation with medical clients. They don’t have money to pay the BAS, pay superannuation or the quarterly tax and want to know how to deal with it. And once they are behind, getting back up to date is a long drawn out and stressful process.
Here is something that you may not be aware of. The biggest killer of businesses is actually the ATO.
Here is what I do and you should too.
- Every week add up the money that comes into your bank account and transfer a % to your ‘taxes’ bank account. This is the GST you must pay the ATO. It is not yours so segregate it.
How much should you transfer? Well speak to us or your accountant who will based on previous BAS amounts tell you.
- Every time you pay wages transfer the PAYGW and the Superannuation to your ‘taxes’ bank account. Again, this is not your money so segregate it.
If you do the above and find you are running out of cash it means you are spending beyond your means and using the ATO for finance. Never a good thing.
2. Transfer Your Profits
Here is why most medical businesses are not successful. They do not know what profits they want.
Work out what profits you want AND then take it out.
So if you want 5% profits take 5% (after GST) and transfer it to a ‘profit’ bank account every week from money received that week.
If your medical business needs it, you can put it back but unless it does leave it there!
3. Don’t Borrow Unless You Have To
Debt will kill a medical business. So, if you can avoid it do so.
Many medical practice owners will happily (and casually) put their house on the line as security but think carefully before you do that.
Only take a loan out if you believe what you will be buying will add more dollars to the profit line. If not, it is not good debt. It is bad debt.
4. Business Partners Usually End Up Crying
I often see two or more medical professionals get together as business partners. And that make sense. You can grow a lot quicker than if you tried everything on your own.
Having a business partner is just like a marriage ….. except there is no sex. And we all know that a sexless marriage is not a good thing. Maybe that explains why business partnerships don’t often work.
Most business partners end up breaking up. Especially in they happen to be running a medial practice. This results in an ocean full of crying. And an ocean full of alcohol consumption too.
If you are going to get into bed together without the sex make sure you have a proper prenup. In other words, spend money on a good shareholders agreement. It won’t stop the crying, but you might end up consuming less alcohol.
5. There Will Always be a Rainy Day
Covid was a classic rainy day. It was actually 3 years of raining but the government stepped in and gave us so much money we all thought it was sunny.
But that is unlikely to come again. Save for a rainy day.
Work out how much money you need to burn every month. This is the amount of money you must pay out even if you have $NIL income. Call it your ‘burn’ rate.
Then make sure you have cash balances or resources that allow you to cover 3 months, preferably 6 months.
Eg you need $30,000 a month to pay for wages, rent, Super, ATO etc and other things to stay alive. This means you need $90,000 in cash or loans you can call upon now which will cover you for 3 months.
Hopefully these will help you manage your cashflow. If you would like more assistance, please call us. We would love to help you out.
