67: Cash Burn rate

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You have this natural talent, this unique ability. Hello everyone and welcome to another episode of DSO Secrets. I am Ken Kaufman, your guest host today, filling in for the illustrious Emmett Scott. Now, no doubt, and no question, our industry has been hit hard by this pandemic. Some of us are closed down completely. Others are open for just emergencies. With the exception of a few specialties that are uniquely positioned to be swamped in a time like this. With emergencies like oral surgery and endodontic procedures, most of us are seeing a huge reduction in revenue, if not 100% reduction. 95 to 90 to 95% reduction in revenue. This is certainly a crisis. So just to give some context here, in my very first real job after my undergraduate degree in business, I was in a company that grew really quickly and then ran into some serious internal problems. And the company quickly became insolvent, meaning it did not have enough cash and enough assets if liquidated to pay for its liabilities. This was a big problem and an interesting educational ground for me. And my first real, what you'd call full time corporate job. I got to participate in the process of getting that company turned around and I got to witness the entire process, what it took from beginning to end. Now you fast forward to really it's been more than 20 years since that time and I've had similar experiences on multiple occasions. Two of them were when I was the full time CFO or chief financial officer of the business. And there was a handful of other times where I was called in as a consultant to help get businesses turned around that were either in an internal or in a crisis as a result of either internal issues or external issues. The interesting part of it all is that the principles that that help companies get turned around, they're generally the same regardless of if it's from external forces or internal forces. Out of all these companies that I've helped get turned around, only one of them did not make it and did not survive. And that was an interesting case. In and of itself, because ultimately the two owners, who were also married to each other, were in a very heated, contested, and I'd say nasty divorce. And they were both stealing money from the company as fast as they could. By the time I got there, there was pretty much no cash left and they had burned all their bridges and there really weren't assets and the ability to get that one turned around. And it was truly tragic. Ultimately, nothing I could have done to apply the principles that I'm going to talk about here about getting businesses turned around and through difficult crises. So here's my point. I only share this background and experience, not to try to make myself sound important or anything like that. It's. I just want to share this, this perspective. I've seen this movie. I know how this ends. And the same principles of success can be applied here, just like in these other circumstances and situations that I've seen and witnessed. So some of you have possibly been through difficult things as well that are along these lines causing real financial duress on your businesses. So another just interesting point that I had not thought of that I've become a bit too seasoned around when things get crazy like this is. Many of the people that I interact with, both at Community Dental Partners and outside of Community Dental Partners have made some really interesting comments to me. I've heard them say to me, how come you're so calm? And they say that in a very stressed, kind of worked up voice. Or they say, aren't you freaking out? Or how can you be so calm and confident during this period of time? Or my absolute favorite, and I'm paraphrasing, I can't remember exactly how this individual said it, but she said, I am freaking out over here and you're as calm and collected as ever. What is wrong with you? I just kind of had to laugh. And ultimately I'm maybe a little bit hardened or seasoned around this, that, hey, when we go into any type of a crisis, here are the principles we apply and we execute them to the best of our ability. Meaning we're taking control of what we can take control of and then we just don't worry about the rest. Now let me jump into the key, key principle that is at play when a crisis like the one we're currently in happens. And it's this very simple, cash is king. Cash is king to surviving through the downturn. And it's also key to thriving when it's time to ramp back up. For the surviving part, you have to remain solvent and you've got to Hang on to as many assets as possible during the thriving part, or what we'd call the rebuilding part. Well, dental practices take working capital. If you think back to when that practice was first started, it took working capital of money going in before that practice ever generated any type of inflow and let alone any, you know, leftover to be able to take home or to go and invest or do other things to continue to build your business, you have to think about it the same way. Sure, you've got all the equipment set up and those things, but you've got to get staff, you've got to start getting your marketing going and there's a lot of expenses you've got to pay for before you start to see your first doll coming in from third party payers or maybe even from patients who you've got to put on payment plans, depending on, you know, what the circumstance is. So in this rebuild, it's just as important, and cash is just as important in this, so that you know what pace you can ramp up and build up without becoming insolvent or without completely running out of cash. That's it. Cash is king. It's a trite saying, it's an overused saying, but it's absolutely true. The two tools that will most empower you during this period of time to make sure that cash is king so that not only can you handle the surviving part, but also the thriving or the rebuilding part, is first, the cash burn rate metric. And the second is a week by week cash forecast. So this cash burn rate is a metric that's going to empower you to preserve cash during the downturn and then deploy cash effectively when you go into rebuilding mode. And I'm going to spend some time talking a little bit further about this one. This second tool, which is this week by week cash forecast that enables you to act quickly and decisively to both, you know, preserve the cache as you're ramping up and make sure you have it so that you can make sure you have enough cash to, to be able to get that practice all the way built back up. I'm gonna hold off on that one and I promise I will do another episode here shortly where I will go through the details of the cash flow forecast. And in fact, I even have a template spreadsheet that I will share in the show notes that you can use to build your own week by week cash forecast. And hopefully I've got it simplified down enough and the buckets, if you will, of categories so that you can be able to put something like this together really, really quickly. And again, the reason why the week by week cash forecast cash is so critical is because that is how you calculate your cash burn rate. So knowing that I'm going to get into that in the next episode, let's just take a minute and talk about cash burn rate and what it is and how it works and why it's so critical in a time like this. So your cash burn rate is merely a calculation. This is just math that says in a given week how much money came in. And then we subtract from that or I'm sorry, we start with what is our starting cash balance. Then we come down and we look at how much cash came in and then we look at how much cash went out. And then we have a calculation that tells us, okay, what was the net of the inflows and outflows? And then whatever the inflows or outflows were for the week, we then have an ending cash balance at the end of the week. The cash burn rate is that middle number. So let me use an example. Let's say that you have 100,000, or let's say you start the week with $100,000 in the bank, you have another hundred, you have $50,000 in cash come in. And it can be from all sources. Third party payers collect cash care credit, or if you have a third party outsourcer that's collecting on your payment plans from your loans, whether it's recourse or non recourse, whatever it is, you have all that, you have that money coming in, you have 50,000 come in and then you go down to the next line and you look at, you've got 100,000 going out. So the net between those two is a negative $50,000. And then you take that negative $50,000 and apply it to the hundred thousand dollar beginning balance and you get a $50,000 ending balance. Your cash burn rate is that negative $50,000 in that calculation of your beginning to ending cash balance. And that cash burn rate is something that you need to know. And here is the reason why. If you know that your cash burn rate is $50,000 and you've cut expenses as deep as you can, you can't go any further. You just to sustain life, you've got to have $50,000 of weekly expense and you've got $100,000 in the bank, then you can quickly understand you have two weeks and you're out of cash and your survival is coming to a really quick end. If you have let's say $500,000 in the bank as your ending balance. And you know that your ongoing cash burn rate is going to be $50,000. Then you can say, okay, I've got 10 weeks to make it and to get to where I can start to generate revenue and start to get my cash flow positive. And what the power of the cash burn rate is, it gives you this visibility to how long can you survive before you're just completely out of what we call dry powder or you're out of cash. Now the interesting thing is, is that if you can do things over time to reduce your cash burn, say hey, it's $50,000 for week, week two, but by week three, I'm going to be able to get that cash burn rate down to $25,000 or $20,000 or whatever that number is. You can see all of a sudden, based on your bank balance or your overall cash balance, you can see how many weeks and how many months you've got out ahead of you before you completely run out. So this cash burn rate is super critical. And the only way to truly calculate it is to build out an entire cash flow forecast week by week so that you have clarity. And you build that out for two reasons. One is so you can see the cash burn rate. But two, you can start seeing really clearly where are places where you could potentially reduce cash expenditure and also where could you increase any cash inflows to be able to improve your cash burn rate. Now, I want to back up for just one second. This isn't a new concept, this cash burn rate, especially in the software industries industry, this is a very common metric where a lot of money is spent to build software and maintain it. And then a sales team is put in place. Once that minimum viable product exists and it's being improved on, the sales team goes out, starts bringing in customers that are paying. But generally speaking, they're put on. You know, in today's world, you pay for your software on a month by month basis. And so these software companies are spending on their R and D and on the maintenance of this software to the, to a tune that's way higher initially than the amount of revenues that are coming in because they're not. Generally you're not paying for an entire year at a time. I guess some software companies do that and, and this is the reason why. It's because they're trying to reduce their cash burn rate. But the concept here, or the process of all of this is that in these software companies, they're measuring their cash burn rate all the time because they want to see how much are they bringing in and collecting from customers versus what is, you know, their payroll and all their other expenses. Even though their margins may look fantastic on an accrual basis and you know, they may be profitable, they don't have the cash to be able to sustain or if they don't have the cash to be able to sustain life, the company could ultimately die. And so they're constantly working, number one, to try to reduce their cash burn rate. And then they're constantly looking at what is the cash burn rate relative to how much cash they have. And that gives them their survival date, meaning they can survive to that date. If they can go sell some more deals, collect some more money, then they can actually survive further and further until they get to a cash flow positive state where no longer do they have a cash burn, they actually have a cash accumulation happening on a week by week and a month by month basis. So other industries have used this term, it's not common in dentistry, hasn't been brought up very much. But in this scenario, the cash burn rate is very applicable and can help all of us to see clearly where we can make better decisions and also give us confidence about how much longer can we sustain being closed or being at, you know, down 95% of our revenues or 90% of our revenues before how long can we sustain that before we would run out of cash. So now again, I promised in the next episode, I will get this next episode recorded shortly, but it will be focused on that week by week cash forecast, how to build it, how to put it together, how to measure the cash burn rate and then ultimately empower you so that you have real clarity and you can gain a ton of confidence around your current path and hopefully gain insights in the process to improve the duration, the length of that as well as then on the back end, we start building in, ramping up and seeing how that cash is going to get consumed in payroll and marketing costs and everything to get ramped back up that payroll get or I'm sorry, the cash is going to get consumed for a short time and then we can build out when inflows start coming in and start seeing how the whole picture can come together and we map out our success plan. Cash is king. That's the principle here. Cash is king through the crisis and the rebuild or the ramp up period of time. So I hope this has been helpful to you. And just as a reminder, in parting, if you haven't already, please join the DSO Secrets Facebook group page. It's been super active here for the last month. Lots of great ideas and concepts being shared, webinars and lots of great content and appreciate everybody contributing there. And in that way, feel free to jump on there and ask me some questions about how this cash burn rate works or once we get the cash flow forecast out there. And this is just it's a great community that Emmett has built up and that all of you have helped to build up. And in parting, as Emmett always says, until next time, keep smiling.

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