Shayan Rashid: Hi, I’m Shayan Rashid, partner with SRJ Chartered Accountants. I’m joined by my colleague Craig Gibson from Scotiabank Healthcare Banking. This is part three of our series for healthcare finance and accounting. Specifically, we’re going to talk about how to streamline cashflow. So Craig, sometimes when we have a new associate or someone who’s looking to start their own practice there can be specific cashflow issues. When they have, let’s say, new staff they’re bringing on, or they’re looking to expand, what specific advice or products are available to these individuals to help them through this transition?
Craig Gibson: So usually when you have brand-new startup practice, cashflow is usually always tight for the first year or two. So, we can provide them a credit line that they could use for their business and that would be up to 25% of their annual billings and that’s done usually as part of the credit in the beginning, when they get the loan for the purchase of the equipment and the cashflow that their accountant help them prepare. And also, we provide them with a corporate credit card that they could use for making purchases, supplies and such. The other important thing to remember also, is that as a new associate, starting out at a new practice, it’s always good to keep your previous job and keep working so you at least have cashflow coming in to support your personal needs and things to pay for as you go along.
Shayan Rashid: And in terms of, let’s say, there’s a big equipment purchase coming up, would you recommend paying that from cash within the corporation, or even obtaining finance for that, what are your recommendations?
Craig Gibson: We would always recommend anything large, any equipment purchases, or any renovations, to always apply for a loan for that. Use your credit lines strictly for cashflow items like rent, payroll, and day-to-day purchases, but put anything large on to a term-loan and pay it over time.
Funds for Personal Use
Shayan Rashid: Okay, I know when it comes to pulling out funds from the corporation, for personal use, for RRSPs, we generally want our clients to plan it in advance for that. We usually give them the salary schedule, and the structure in terms of monthly what they should be withdrawing. Are there any other tools on the personal side that they would need, or RRSP loans that you could also assist with?
Craig Gibson: The one thing we come across a lot is trying to collect money quickly. Some offices have trouble getting money out of patients, so it’s also important to get tools. For example, Chase payment tax where you could get your payments right away in a fee for service office. And there’s other ways that you could get your money faster, you could have a payroll service to pay your payroll, say every two weeks instead of every week to save money that way too.
Issues with Lines of Credit
Shayan Rashid: So, are there any issues or hurdles you see with the line of credits or with the way that it’s being used?
Craig Gibson: Sometimes clients are using their lines of credit for personal use when they should be using it for practice or business use. If we’ve already given them an established line limit, once they reach that threshold, it’s more difficult to get them an increase. And sometimes it’s just, maybe, poor planning or poor cashflow budgeting, and if they were to speak to their account on a more frequent basis or even have a bookkeeper in house to help them with budgeting, that might make their cashflow smoother.
Budgeting and Annual Reviews
Shayan Rashid: Yeah, it’s a good point, because we see that as well where it may come time to purchase the house or it’s RRSP time and they want to pull out a significant amount and they haven’t planned for that. So, we recommend, always, is budgeting on a monthly basis, let’s say, three months out, six months out, even two years out. So, you know what your actuals are and then comparing that on an annual basis or even a monthly basis to ensure that if you’ve planned for a specific amount of business or revenue, to determine if that’s come in. And then also, from a higher level, to review monthly-annually with your accountant and bookkeeper to see what’s going on, it’s really going to help grow the practice, and then take it to the next level.
Craig Gibson: I would also add to that that as a bank we usually are always doing annual reviews, so each year we would come back to the client, ask them for their most recent financial statements, their tax returns, and that is not a forward-looking document. But part of doing the review would be, how was last year, what do you think you’re going to do for this year, and I’m sure you guys go through that with clients to see how the billings are going to grow, how things are going to move, because chances are they’re going to want to buy more equipment, renovate, add more space, so it’s usually a constantly living thing, it’s always changing as they go, they just have to be maybe more involved day-to-day with their accountants help as to how the practices moving along.
Shayan Rashid: Yeah, what we like to do is give them a compensation schedule at the start of the year so they can plan what they need each month on a personal level, and then withdraw that from the corporation either through a salary or dividend. That way, at least they know exactly how much money is going to come out from a personal level, and they can plan and take into consideration large purchases such as the house, vehicles, whatever it may be, in that way they don’t get stuck with needing 40, 50, 60, 70 thousand dollars in one lump-sum time. So, for us, that’s the most important cashflow tool, making sure you’re planning in advance, you’re checking your budgets, or you’re creating budgets even because many people don’t even create budgets, And then checking that against actual, that’s your number one tool against short falls in cashflow in any specific period. Okay, that’s great advice, I think that’s a good basis for individuals and practices to start with. The one area that we haven’t discussed is more established practices and what they need to plan for. Do you have any advice there in terms of what they should be looking out for?
Craig Gibson: I think they have a lot of the same, maybe day-to-day issues as a small practice or a startup practice. It’s mostly about budgeting and managing the cashflow with a credit line, you could use that money for anything you want to, but we also try to educate the clients by saying to them, “Use your credit lines for cashflow needs, rent, staffing, day-to-day things, emergencies, maybe set aside 10% of the limit for an emergency only basis. Anything large or anything predictable such as the expanding your practice, put that onto a term loan.” When you have multiple practices, sometimes you have multiple credit lines and multiple loans, so clients do have the ability to move money from practice A to practice B, so they do have a bit more freedom, if you just have one practice you can’t do that, so maybe they’ll work as an associate for a couple of days a week, to provide more avenues of income. Sometimes even if you own a practice, you could work at another practice a day or two week part-time to pick up additional income that way.
Shayan Rashid: Alright, thank you Craig for the great advice. If you have more questions you can reach out directly to Craig, Scotia Bank Healthcare Banking or if you want any advice on tax or strengthening up your structures, reach out to us at SRJ Chartered Accountants. If you want access to all the information in this series, you can go to srjca.com/healthcare.