Business owners and leaders need a strong understanding of the financial fundamentals for success. Without a solid financial foundation, you may never achieve your goals, let alone build wealth for the long term.
This foundation will help you get organized, build and manage a budget, understand the numbers, and focus on your cash flow as you scale. Here’s how to get started.
Before you can build a strong foundation, you first have to know where you stand currently. This requires you to take into account what you’re spending and what you’re bringing in, and establish your personal and professional goals.
By identifying areas for growth or processes that can be improved, you can begin to see where and how you can improve your financial prospects. You should feel confident in your approach and ready to move forward in building the right foundation for your business.
As you get organized, you will also want to decide on third-party apps to streamline and automate your business, financial accounting software, and an experienced accountant to help guide you.
Understand Your Numbers and Their Correlations
Understanding the financial fundamentals and what influences them is crucial to growing your business.
The numbers tell the financial story of your business and can help you identify where you need to make changes.
For example, your efficiency in collecting outstanding invoices is directly related to the strength of your cash flow. If you fall behind or allow unpaid bills to go delinquent, it reduces the amount of cash coming into your business while increasing the work (and cost) for collections.
If you are not bringing in enough patients each month to meet your revenue goals, you may need to revisit your marketing or cut your expenses. If you want to make capital investments or open new locations, you’ll need enough ROI to justify the investment.
When you understand how things connect, you can make better business decisions.
While there are plenty of financial metrics you can use to guide your decision-making, your reports are crucial to understand:
- Profit and Loss Statement: The scorecard on your financial performance
- Balance Sheet: An accounting of your assets, liabilities, and capital
- Cash Flow Statement: The measure of how much money is coming into and out of your business each month
Focus on Cash Flow
The number one reason why small businesses fail is a lack of cash flow. As many as 82% of businesses fail because of cash flow problems. You may think your practice is immune to this stat but the truth is, it’s a business and you have to manage it like one.
Effective ways to build cash flow include:
- Setting payment expectations from the start
- Improving your accounts receivable
- Maintaining good insurance records
- Keeping claims, EOBs, and payments all in one place
- Using an automated system for follow-up
A healthy cash flow is a sign of a healthy business. It allows you to pay your staff and bills on time and see the impact of changes.
Cash flow is also one of the key components that lenders will examine when considering granting credit. A lender wants to make sure you have the financial ability to repay your debts.
Build and Manage a Budget
A budget is an essential tool to estimate future revenue, plan and track expenses, and manage your cash flow and profitability. By building and managing your budget, it becomes the backbone of your finances and a way to measure progress against your financial goals.
Building a budget requires you to take stock of all of your expenses, including things like:
- Rent or loan payments
- Marketing costs
- Bank fees
- Software tools
- Financial management
- Other operating costs.
You will also want to take a realistic look at the number of patients you can handle and the potential revenue that can generate.
Comparing your revenue and expenses shows your cash flow. Your budget shows your profitability.
Once your budget is created, you will want to:
- Stick to it: Consider it your strategic planning document for financial performance
- Review it often: You should review it at least monthly to gauge performance against goals
- Adapt when needed: It’s OK to make changes, but consider the implications on your budget before making a change.
Business owners often make the mistake of thinking of their budget as only a way to monitor their past performance. When you build and use your budget properly, it becomes the roadmap for your future success.
Rely on an Experienced Accountant
A strong financial foundation is essential to running a successful mental health practice. You need to know your numbers and the story they tell to ensure you’re staying on track to meet your goals.
We’re here to help.
Leichter Accounting Services is an experienced Baltimore CPA firm with a passion for accounting and dedication to our clients. We devote our energy to ensuring you have a solid financial foundation for growth. We offer a range of accounting and financial services, including bookkeeping, financial reporting, tax preparation, and more.
To learn more, contact Leichter Accounting Services today.