68: Cash Forecasting in a Crisis and Ramp-Up

Welcome to DSO Secrets. I know what it's like to be an entrepreneur in the dental industry. I've had my ups and downs just like you. There's so much opportunity to be excited about, but so few resources to get answers. From here on DSO Secrets, we get you those answers so you can change the lives you're meant to bless and achieve your personal success.

When I was working as an associate right out of school, I never imagined I could own these many practices with this amount of support. So thank you.

You have helped build my marketing mind

to a whole new level.

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. In the last episode, I talked about the cash burn rate and why it's so important in leading a business through both a crisis and a ramp up. I even introduced how to calculate it on a very high level. I also discussed this key principle of during crisis or ramp up that cash is king, meaning all decisions during a crisis or a ramp up like we have faced or like we're going to face in ramp up should focus on cash preservation as much as possible and only letting cash slip out of your bank account for the most critical things like the business sustaining things in your business and accelerating collections of cash as well. So we're containing and controlling what's going out and doing everything we can to bring cash flow in as quickly as possible. Now, you might be a little bit surprised by this, but this principle that cash is king, it really does apply just as much to the ramp up as it does to a crisis. Now, in this episode, I'm going to get into the details of how to calculate the cash burn rate by using a weekly cash flow forecast tool. Please, I don't want you to be intimidated intimidated by this. My goal here is to help you really get your arms around and get your hands into cash flow in a way that I hope to make very easy to understand and very easy to apply to your situation. Now, as I thought through how to best give you this material, I realized that a simple podcast wasn't going to be enough. So here's my commitment to you. I'm going to talk through in this episode several parts of the cash forecast. But then my plan is to provide you a Google sheet template for creating your own forecast that applies to your business, as well as a video of me going step by step through the process with that Google sheet showing you exactly how to fill it out. So here's my recommendation for tackling this project or this building out this tool. Listen to this episode and understand the basic concepts. Then head over to the DSO Secrets Facebook page or Facebook group where I will post this cash flow forecast template as well as a video demonstration of how to fill it out. So let's jump into the why behind the cash flow forecast. Why is it so critical in times of crisis and in times of ramp up? Well, when you experience a major change in your business, such as dramatic decrease in production or revenue, or a very dramatic increase in revenue, this tool is used to understand as best as possible how to understand these changes in your business are going to impact your cash flow. When a business is running steady, cash flow can be generally pretty steady. It can be a little lumpy in your payroll weeks and those sorts of things. But really at the end of the day, it's dramatic ramp ups and dramatic ramp downs or crisis as we're referring to it here, can cause your cash flow to get all wonky. And you may think you've got cash, but you don't. Or you may be worried about having cash, but you don't need to because you're going to have plenty. This tool, this cash flow forecast, helps you measure your cash burn rate and your cash accumulation rate and then predict how long you can keep your business afloat before you run out of cash in a crisis or you run out of cash in a ramp up scenario. It also can give insights to improve cash flow and extend the life of your business as long as possible. Because there will be little details in there. You're going to see and say, oh, if I change this, if I tweak this, if I lay a few more employees off over here, or if I provide these extra services over here, that's going to create a significant potentially impact to your cash flow. So what exactly is the function of this cash forecast? The function is to project all of your cash inflows and all of your cash outflows, which will eliminate or ultimately estimate what your weekly cash burn rate is. And then you measure your actual performance against your projection and you start to learn. And then it makes you better at forecasting the future weeks. So there's a learning process, an iterative process, and as you get into this, in my world, in the world of finance, we call this the process of validating and invalidating assumptions. Because anytime you make a forecast, nobody has a crystal ball. Nobody can say exactly what's going to or what is not going to happen in the future. We make our best estimates Based on assumptions. When we then measure and put our assumptions up next to what actually happened, we either get feedback of your assumptions were valid or they were invalid. So when they're valid we know, okay, let's keep making that assumption. And when they're invalid, it allows us to pull back and say, okay, what are the new what, what information is this giving me and what assumptions should I make going forward? Now, how frequently should we be measuring cash in a crisis or in a ramp up? My preference is weekly. Monthly is just not frequent enough. When we're in a crisis or a ramp up, there is too much cash that can slip out of the business too quickly. So it just needs this hyper intense focus during these steep curves that our business is going through. Weekly can also allow us to get our production amounts by week organized correctly, sometimes for a month. There's a lot of information there. But what if you do a lot of your production at the end of the month versus the front of the month? Or you have collections that come in at a certain point in a month versus another? Or sometimes your payrolls are going to be spread out throughout a month and knowing which week they are in can actually be super critical. When your rents are going out, all of that, it's getting all these ebbs and flows into the right weeks as best as you possibly can. Now, I don't recommend doing it daily. That can be overkill. There's too much detail going on there and ultimately there's very little incremental benefit gained looking at things weekly as opposed or looking at things daily as opposed to weekly. So weekly for me ends up being that the nice happy medium spot. And then you can go back to looking at cash on a monthly basis. Once your business gets leveled out again after the crisis coming down, it levels out and then the ramp back up. It takes a while and then it'll level out. Now what are the key measurement categories associated with this? And when we go into the spreadsheet demonstration that will be over on the DSO Secrets Facebook page or Facebook group, you will be able to see these broken out in great detail. We look at first the sources of cash and then we look at the uses of cash. Cash sources or another word for this would be cash inflows generally break out into these subcategories. Current receivables that are still due to be collected from insurance and third party payers. What you do is you take this number and you break it out into the weeks where you think you're going to be collecting those receivables Then you jump down, you look at, okay, what about your estimated patient pay at point of service? So you're looking at, okay, what's my production going to be and how much of that is going to be collected this week because the patient's paying for it and how much is third party payers. And you start to figure out and you can go back and look at your historical detail and data about where your inflows are coming in. If 50% of your money comes from insurance payers and 50% from patients at date of service. I know it doesn't always work that way, but if that were to be the case, then you'd look at your production numbers and say, okay, I said I was going to do this much production in this week, so let's do 50% that we'll collect from the patients. And the other 50%, it takes 30 days for the payer to pay. And, and so you just go ahead and skip out to that week. That would be 30 days out and you drop those numbers in there on a week by week basis also. Yeah, and the thing, the point I wanted to make here is there's a balance between looking at, okay, how much is currently owed to you from payers and patients and what's your current production and you can even put them on different lines. That's what we've chosen to do is we look at, okay, what are our balances and what's our regular timeline to collect and then we drop new production in as well and let that space its way out down in the future. In addition, the other major inflow that may be coming into you right now are loan proceeds. So we put a line in the forecast for this as well. If it's PPP loans, if it's EIDL grants, wherever your loan sources or proceeds are coming into the business from, you've got a line item to account for that as well. So that wraps up kind of the cash sources group. Now let's go to the cash uses group or the cash outflows. One of our biggest we know is payroll, including doctor pay and staff pay and support center pay and independent contractors. And if we outsource call center or billing, we have, you know, series of vendors around us that all, for all intents and purposes are acting like payroll. So it includes, all of that includes, you know, that that amount you're paying to your payroll company and these other folks. And the great thing about doing this by week is you get, can put your numbers in right there in that week and in Your forecast you should be able to or you should be calculating out where is your payroll going if you've done some layoffs or where is your payroll going to be out in the future if you are planning to ramp up and at what pace are you ramping up up your staff and then putting in the week where those wages would be applied. Next we jump into the accounts payable section. You can break this out into a myriad of buckets, but I've kind of highlighted into about six. The first one is all of the benefits for your employees. So you have a health insurance bill, perhaps a dental insurance bill if you do that, vision insurance, disability life insurance, if you have a 401k or some type of a retirement program set up that you're contributing to, or if you're even taking employee money out of their paychecks for you have an obligation. In fact, I probably need to clarify this one piece is as an employer, if you're taking money out of your employees paychecks for health insurance or for any other benefits, you become a fiduciary of those funds and you have a responsibility based on your relationship with your employee and that deduction you've taken from them to make sure those funds get forwarded to where the employee designated that they want them to go. So for example, if they pay $300 a month towards health insurance and you collect that out of their paycheck, you need to make sure that that bill gets paid. So first of all, in your accounts payable, you're going to want to list out those benefits and where you have that fiduciary responsibility. And there may not be a lot of wiggle room here. There might be a little bit in terms of you playing with the timing of the payments. Next you go to the next category is supply and lab vendors. So this would be your Henry Schein, Patterson, Benco or whoever your main suppliers are and then whatever labs you're using and you can list here or take a look at your accounts payable at how much you owe now and how much is in the current 30, 60, 90 day buckets and time out when you're going to pay that. And then with your current, your ongoing production, you're going to want to measure that out as well so that you can see with your production say ramping up, when are you going to have to pay for supplies as that production is ramping up. So again, all of that is lined up really nicely in the cash forecast. Rent is another category. Utilities another category. I know that we're Doing everything we can right now in our business during the ramp down to not pay out too much toward rent or utilities. And then we're going to try as best as we can to not pay too much out either on the ramp up, because cash flow gets super tight in the ramp up. And then making our landlords whole once we can get through this dip in the business. Also, you know, marketing costs, professional and legal, those are the last couple of buckets that I have here that you can think about. However you organize your accounts payable and the way that you process payments out of your business to vendors and others outside of your business and your payroll, you want to think about all of those out, all of those outflows, and all of those I put under the accounts payable bucket. Then you have credit cards. If you're using an American Express or you have other credit cards in your business, you want to look at the timing of those and get those spread out week by week. You also want to look at loan payments that you're making. This would include both principal and interest. Because here on a cash flow report, we're just looking at what the true cash outflow is. Then the last one is any capital expenditures. If you are in the process of buying equipment or doing some type of renovation in a practice or building a new practice, or investing in some way making some type of capital expenditure, you'll want to put a line item in for that as well so that you can grab. And all of this altogether totals up to what your cash uses are. Now, here is what cash burn rate is. You take all of the sources or inflows, so all the cash coming into your business, and you add all that up. Then you take all of the outflows. And this is on a weekly basis. You take all the outflows that are going out from your business from your bank account, and you total that up. Then you take all the inflows and you subtract from it all of the outflows and you have a cash burn rate. Or if it's positive, you have a cash accumulation rate. Let me give you an example. First of a cash burn rate. Let's assume that during a week, you bring $50,000 in in sources of cash or inflows. But your uses or outflows are $100,000. So you take the 50,000 coming in, 100,000 coming out. That means you have a $50,000 burn rate for the week. Or if that was what your average was going to be, that would mean a little bit more than $200,000 a month would be your cash burn rate. Now, it can work the other way as well. Perhaps there's cash accumulation as opposed to burn that's happening in your business. And this would be an example of what that would look like. Let's say that you have sources or inflows of $100,000 come into your bank account for the week. You pay out or use 75,000 of that, so you take your 100,000, you subtract it from the 75, or you subtract 75,000 from it and you get an accumulation rate of $25,000 per week. Or that would work out to a cash accumulation of a little more than $100,000. Now, I know all of us wish we were in that place right now, today, when you, when we all get our businesses ramped back up and we're running at our optimum levels of efficiency and effectiveness, then hopefully we'll all be in back into that cash accumulation phase. But important to know how the formula works both ways. Now, the process to update this report. Generally speaking, I like to do it on Mondays or really whatever day of the week works for you. And what you do here is you're looking at the prior week and figuring out, okay, what actually happened. And then during the week since you last updated the forecast, you collect a bunch of data points on timing of different things. If you have to end up paying some, you have a conversation with some vendors, you need to pay them a little sooner, or perhaps you, you've bought yourself a little more time and so you can push them out a little bit later. And you collect data points on all of these things. Maybe your changes in payroll, if you've had some layoffs or whatever it is, whatever your changes are, you update your forecast as you go throughout the week. And then from your bank account data and other reports, you input last week's sources of cash to determine how accurate your forecast was. You're looking for validated and invalidated assumptions like I talked about. And then you make adjustments to all the future weeks in your forecast based on what you learned. Here's an example. You were able to get some rents deferred. So you go ahead and make those adjustments even though you thought you might have to pay them that week, or let's say that your AR collected a little early. So what that means is the amounts you put in future weeks out after that, you're going to need to reduce because you don't have as big of an AR balance if you're on A ramp down, down. And then you're also going to want to go into that bank account data and then other reports that you have. And you're going to want to input what your last week's uses of cash were to see how accurate, accurate you were. And then you can adjust and update your forecast accordingly. So, really simple process. You pick what day you want to do this and during the week you're capturing different data points and what you know about the future. You sit down on say Monday or Tuesday or Friday, whatever day it is, you look at the prior week and you measure all the inflows, you measure all the outflows, get your report all updated so you can see what happened. You can see where your variances were, validate and invalidate assumptions like I talked about. And then you get down to that bottom line and you can see what that cash burn rate is. You can see where your bank balance is and then how it all rolls forward. Now, before I wrap up, I just want to mention one other part. For those of us that have more than one dental practice that we support. Where you've got two locations or five or 10 or 15 or 20 or however many it is, this process can start to get tedious and can start to get a little bit complicated. There are some ways and solutions to jump into those details. I'd be happy to jump into that in another episode or perhaps even if you wanted to have a conversation offline or you know, jump over to the DSO Secrets Facebook page and we could chat about it there as well. But the key thing is you're pulling all the sources for all the locations and all the outflows or the uses and coming up with and determining what this cash burn rate is and looking at the future of your business and how long you can sustain business, what cash may be needed during your ramp up period that you don't currently really have visibility that you're going to be able to have to get your practices ramped up correctly and according to your schedule. So I know this is a lot of information and to help you digest and implement all of this, remember I'm inviting you to come over to the DSO Secrets group. Make sure to join. If you haven't. I'm going to post the Google sheet there. You can make a copy of it. You'll have view access and you can make a copy of it and use it for your own business. I'm also going to post a video there of me demonstrating how to use this Google Sheet tool. So if you haven't joined the DSO Secrets Facebook Group page yet now's the time to do it. Maybe this will be the reason that will finally push you over the edge to do it. We need you there to help us build a community of diverse dental and business folks that are all trying to figure out how to navigate through this DSO industry. Many, many thanks to those of you that are already part of the group and contribute to the ongoing effort that Emmett started. I think it's been about a year and a half ago that this was an idea formation and creation I just cannot figure. So anyways, in honor of all the work that's gone in by Emmett and all the rest of the you, I really I'm trying to honor all of you for the ways you've contributed in the way everybody's tried to help each other and I look forward to being able to continue to do that. I just cannot figure out how to sign off from these podcasts any other way than to follow Emmett's lead. So as Emmett always says, until next time, keep smiling.

Thank you for listening to DSO Secrets. Join our community on Facebook @DSO Secrets and get answers and resources to some of your most challenging questions. If you want to get a copy of the seven secrets of any DSO, go to our website at dsosecrets.com and we will get that emailed to you. Remember, don't go at this alone. Let us be your team while you build your team.