I had been attending a bunch of professional meetings lately (no, not in person; virtually).  And, it seems that the pandemic has brought new focus to the management of their businesses.  (It’s about time!)

I’m sure you’ve read my statements that the worst run businesses out there are attorney and physician practices.  Even dry cleaners run their businesses more efficiently.

So, learning what sort of numbers should abound would be a big step in converting these enterprises to be more than vanity efforts.  Which is why I am going to share some of those recommendations with you.

Note- none of these folks manufacture products. Note- none of these folks have significant inventory.  Why do I say that?  Because if your business effects either of these activities, then your needs are vastly different.  If you maintain inventory or manufacture products, then your cash needs must include the normal stocking of said materials.

When we ran our medical device manufacturing entity, we turned over our inventory initially about 26 times a year; by the time we sold the enterprise, turnover was 9 times a year.  That meant our cash needs for inventory was a quarter of a million bucks- and that had nothing to do with our other operational considerations.

Now, our own enterprise is more akin to legal and medical offices.  We have staff, we have offices, and we have general expenses.   For such entities, there is no inventory.  So the recommended safe cash reserves range from 7 to 10% of our annual revenue.  While that may seem excessive to many folks, liquidity (how much cash the practice needs) and solvency (how much debt the practice carries), as well as profitability set those standards.

Every business has big swings in monthly revenue.  So, we need to be prepared, to have a reservoir of cash to get through those swings.  That’s where that 7 to 10% of revenue gets us over the hump- or when the world panics and pandemics close up our businesses!  (Note for the example below, our cash reserves should be somewhere between $ 210K and $ 300K.)

Now, the next step is how much debt does one carry.  Oftentimes, medical practices are overloaded with debt.  If one’s debt divided by practice revenue exceeds 10%- it becomes an immediate issue to pare that debt down.  Something on the order of 5 to 7% secures the sustainability of  the business enterprise.

What about net operating income?  We believe that number depends on where the professional operates- and in what specialties.  But, at the very least, net operating income needs to be 30% of total revenue.  Oftentimes, that lower value is reached because “people costs” are not well managed.  (This cost sector should be on the order of 20 to 25% of revenue.)  Sometimes, the location choice starves the practice- if rent or mortgage is out of whack (not between 8 and 10%), it’s time to move or renegotiate the lease.  General operating expenses should be around 10% of revenue (but could hit 12%) for healthy businesses.

But, when one gets down to it- there are only three buckets of money governing the practice.  The first one is our paycheck- our lifestyle today.  The second one is our lifestyle tomorrow- our retirement investments.  And, the last bucket is the practice-building one- what people, facilities, technology, marketing we need to handle our future business.

Now, here’s the critical overriding factor.  The decisions we make about these three buckets are a zero-sum game.  When we put more money in one of those buckets, we are stealing from the other two.  We have to balance our short-term and long-term goals effectively.

So, where do you stand?

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