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10 Ways for Healthcare Firms to Improve Cash Flow

Author: Ethan Taylor

Hospitals and healthcare organizations are always looking for ways to cut expenses. Unlike most businesses, though, these firms don't have as much opportunity to increase revenue. Cash flow improvement is a challenging situation, but there are definitely ways to improve cash flow in healthcare. (For related reading, see: Top Healthcare Stocks Fueled by Obamacare.)

1. Lease Major Capital Equipment

By leasing equipment instead of buying, you're spreading out your costs. This will lead to interest payments, but unless there is a significant discount being offered by purchasing all at once, it pays to lease because you'll increase the time spread between receivables and payables, thereby freeing up more capital for operations. (For more, see: The Essentials of Corporate Cash Flow.)

2. Renegotiate Terms on Existing Contracts

In order to extend the time for your payable requirements, try to negotiate to extend grace periods on the debt you owe.

3. Accelerate Cash Collections

Billing should always be immediate. This is a simple, commonsense step as the faster you bill the faster you get paid, but it is too often overlooked. Delaying billing can lead to a negative impact on cash flow. (For related reading, see: How Big Data Has Changed Healthcare.)

4. Deploy Equipment in High-Margin Service Areas

Some hospitals and healthcare organizations don't think about margins as much as traditional businesses, but this is a mistake if they want to wring as much cash as possible from their service offerings. Higher margins leads to increased profitability and cash flow.

5. Retool Salary Increases

Every employee in any organization is either an asset or a liability. So instead of basing salary increases on the amount of time an employee has worked there, raises should be based on performance. For example, a two-year employee who is an asset is more valuable than a five-year employee who is a liability. The two-year employee deserves a salary increase before the five-year employee. By rewarding those who deserve salary increases opposed to those who have simply put time in and gone through the motions, you will likely reduce payroll increases.

6. Limit Matching 401(K) Contributions to 1-2 Times a Year

You can still provide generous 401(k) matching to employees, even if the timing of when you pay your match is reduced from every pay period to a couple times a year. By reducing the amount of payments you make, you're freeing up cash for other areas of your organization. (For related reading, see: 5 Signs You Have a Lousy 401(K) Plan.)

7. Restructure Costs for Expensive Procedures

For any high-cost/low-return procedures, present the numbers to suppliers to prove that costs need to be reduced in order for the business relationship to continue. There is no risk here. If they say goodbye, they will take you back if you can't find a better deal. After all, it's all about the numbers.

8. Give Employees Comprehensive Training on Collections

This is a simple step, but it makes a tremendous difference. When everyone knows their role and executes it well, money comes in faster. (For related reading about employees, see: Protect Your Company From Employee Lawsuits.)

9. Accept Electronic Payments

Electronic payment systems are well worth the investment. Enabling customers and other debtors to pay more quickly with less fuss means the speed of receivables increases in any business. Paper payments take longer to process. (For more, see: Speed Up Receivables to Avoid a Cash Crunch.)

10. Sell Unused Low-Margin Equipment

Having unused, low-margin equipment sitting around is a common form of excess inventory in healthcare. It's taking up space and seems worthless, but it can be sold for cash—sometimes lots of cash. And the more cash you have, the better your flow. If there is a lot of equipment that can be sold, consider spacing out sales of it on a monthly basis. This acts as a temporary added revenue stream and can support cash flow for several months.

The Bottom Line

Healthcare firms looking to improve cash flow should focus on increasing the speed of receivables and cutting expenses. Even if they only implement one of the mentioned ideas, it should have a positive impact on cash flow. (For more reading about hot investing topics in healthcare, see: A Quick Guide to Healthcare ETFs.)

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