Managing Cash Flow in a Dental Practice

A practice can be profitable on paper and still struggle to make payroll. That surprises a lot of dentists, but it is common. Cash moves on a different schedule from production and profit, and the gap is widest in practices with heavy insurance participation, large loan payments or uneven months. This guide explains where cash goes, how to work out the collections you need each month, and how to plan ahead so slow months are an inconvenience, not a crisis.

Why profit and cash are not the same

Your P&L reports income and expenses. Several large uses of cash never appear there:

• Loan principal. Only the interest portion of a practice or equipment loan is an expense.
• Owner draws and distributions. These come out of equity, not expenses.
• Equipment purchases. A $90,000 purchase may be depreciated or expensed for tax purposes, but the cash leaves when you pay for it.
• Income tax payments. In pass-through entities, the owner pays tax personally on practice profit, often from practice cash.

Consider a practice that shows $300,000 of annual profit. If it pays $140,000 of loan principal, the owner takes $120,000 in distributions and $60,000 goes to estimated taxes, the practice has $20,000 of new cash at year-end, before buying anything. See how to read a dental practice P&L for where these items sit.

How to read a cash flow statement

Most accounting software can produce a statement of cash flows alongside the P&L and balance sheet. It explains why the bank balance changed over a period, and it splits that change into three parts:

• Operating activities: cash from running the practice. It starts with net profit, then adjusts for non-cash items such as depreciation and for changes in balances such as receivables and payables.
• Investing activities: cash spent on equipment, technology, leasehold improvements or another location, and cash received from selling assets.
• Financing activities: loan proceeds, loan principal payments, and owner contributions or distributions.

In this example the practice ran well, generating $330,000 from operations, yet the bank balance fell because equipment, debt and distributions together took more. That is the pattern to look for: healthy operating cash with a negative total usually means spending and distribution decisions, not the clinical side, need attention.

Find your cash break-even month

Break-even tells you the collections needed in a month to cover everything that must be paid. Split your costs into two groups:

• Fixed costs that stay roughly the same each month: team payroll and benefits, rent, software, insurance, loan payments (principal and interest) and a base owner draw you rely on.
• Variable costs that rise and fall with the work you do: dental supplies, lab fees and card processing fees, usually expressed as a percentage of collections.

The formula is: cash break-even = monthly fixed costs ÷ (1 − variable costs as a % of collections).

Suppose fixed costs, including $12,000 of loan payments and a $15,000 base owner draw, come to $95,000 a month, and supplies, lab and card fees together run about 16% of collections. Break-even is $95,000 ÷ 0.84, or roughly $113,000 of collections a month. A month that collects $105,000 leaves a shortfall of about $8,000 that must come from reserves. Line up this number against two or three years of monthly collections and you can see in advance which months are likely to fall short.

Variable costs should sit near typical ranges, such as supplies around 5–7% and lab around 7–10% of collections. If yours run higher, break-even rises with them. The dental overhead calculator shows each category next to those ranges.

The insurance lag

In a practice where most revenue comes from insurance, the money for a procedure performed today might not arrive for several weeks, and longer if the claim is denied and resubmitted. That lag ties up working capital permanently. A practice producing $100,000 a month with half of it billed to insurance bills roughly $11,500 a week to carriers. With an average three-week payment delay, about $35,000 is always in transit, and that amount grows as the practice grows.

You cannot remove the lag, but you can shorten it: clean claims sent the same day, electronic attachments, electronic remittance (ERA) and electronic funds transfer (EFT), and a weekly review of claims older than 30 days. Cutting the average delay from three weeks to two in the example above frees up more than $11,000 once, without collecting a dollar more. The accounts receivable guide covers the aging report in detail.

Ways to bring cash in faster

• Collect the patient portion at the visit. Give an estimate before treatment and collect the estimated patient share the same day, rather than billing after the EOB arrives.
• Keep a card on file with written consent for balances left after insurance pays, so small amounts do not become statements and calls.
• Offer clear payment options for large cases. Third-party patient financing usually pays the practice soon after treatment, minus a fee; in-house payment plans cost nothing up front but leave the practice carrying the balance and the risk.
• Phase large treatment plans so payments line up with appointments, instead of completing the work and waiting.
• Verify insurance before the visit so estimates are accurate and fewer claims are denied. See the insurance verification process.

Control cash going out

• Set a purchase approval limit. Any order or contract above an agreed amount needs the owner’s approval.
• Budget supplies as a percentage of collections and review the ordering report monthly against it.
• Time large purchases for months your forecast shows can absorb them, and compare buying, financing and leasing on cash flow as well as tax effect.
• Review recurring charges each quarter. Software, subscriptions and service contracts creep up and are easy to forget.
• Pay on terms, not early, unless a vendor offers a discount worth taking.

Seasonal and uneven months

Many practices see softer months around holidays and summer vacations, and stronger months near year-end when patients use remaining benefits. Doctor vacations and CE days create their own dips. Payroll, rent and loan payments do not follow that pattern, and some months have three payroll dates instead of two if you pay every other week. Look at the last two or three years of monthly collections to see your own seasonality, then plan large purchases and owner distributions around it rather than spending a strong December.

Build a 13-week cash forecast

A 13-week (one-quarter) rolling forecast is detailed enough to be accurate and short enough to keep current. Update it weekly or every other week.

Here is what the first four weeks might look like for the practice in the break-even example, with a $60,000 reserve target:

Week 4 dips below the reserve target. That is a decision point a month ahead of time: delay a purchase, reduce that month’s distribution, or draw on a line of credit before you need it in an emergency.

Keep a cash reserve

Many advisors suggest holding a reserve equal to one to three months of operating expenses, with the right amount depending on how predictable your collections are and how much debt you carry. A practice with $70,000 of monthly operating expenses might aim to keep somewhere between $70,000 and $210,000 available. Keeping the reserve in a separate account makes it less likely to be spent by accident.

Build the reserve gradually. Setting aside a fixed amount each month, even a modest one, is easier than trying to fund it from a single strong quarter. In months above break-even, move part of the surplus to the reserve; in months below, draw on it and note why. Once the target is reached, extra cash can go toward paying down expensive debt or larger distributions.

Plan for taxes as you go

Owners of S corporations, partnerships and sole proprietorships usually make quarterly estimated tax payments. Federal estimated payments are generally due in April, June, September and the following January; the IRS estimated taxes page explains who must pay and the safe-harbor rules. Virginia’s individual schedule starts later, with payments generally due May 1, June 15, September 15 and January 15, according to Virginia Tax.

A simple habit: move a set percentage of each month’s profit into a tax savings account. Your CPA can set the percentage based on your projected income, so the April and June payments do not collide with a slow month. For the bigger picture, see tax planning for dental practice owners.

Debt and lines of credit

Practice acquisition and startup loans often carry large fixed monthly payments. Before taking on new equipment financing, add the payment to your forecast and your break-even, and check that the practice can still cover it in a slow month. A business line of credit is useful for timing gaps such as insurance lag or a large supply order, not for covering ongoing losses. Lenders, including those offering SBA 7(a) loans, look more favorably on a practice that applies while its financials are strong. Our guide to dental practice loans covers the main financing types.

Cash flow in a new or newly bought practice

A startup usually spends heavily before collections build, and its first insurance payments arrive weeks after the first patients. A purchased practice has a running patient base, but the buyer often starts with an empty bank account while the seller keeps the old receivables. Either way, plan for several months of payroll and rent from working capital, which many practice loans include as a separate amount. The guide to what it costs to open a dental practice covers how to budget for it.

Warning signs and quick checks

These signs usually show up before a real cash crunch:

• Vendor bills paid late, or payroll timed around deposits.
• Insurance receivables older than 30 days rising month over month.
• Patient balances growing faster than production.
• The line of credit balance never returning to zero.
• Distributions taken whenever the bank balance looks healthy.

When cash feels tight, work through this list:

1. Compare this month’s collections to the same month last year and to your break-even.
2. Check insurance claims older than 30 days and patient balances older than 60 days.
3. Review owner distributions for the last six months against actual profit.
4. Look for new fixed payments such as equipment leases or software added this year.
5. Confirm the last estimated tax payment was sized correctly, not too high or too low.

Owner distributions: a simple rule

In many practices, the biggest variable in cash flow is the owner. Distributions taken whenever the bank balance looks healthy tend to drain reserves just before a large tax payment or a slow month. A steadier approach is to set a regular base distribution that the practice can support in an average month, then take a true-up distribution quarterly once the books are closed and taxes are reserved. For how salary and distributions fit together, see how dental practice owners pay themselves.

For example, if your practice averages $35,000 a month of profit after loan principal, you might set a base distribution of $15,000, reserve for taxes as your CPA recommends, and review the remainder each quarter. That way a strong month builds reserves instead of being spent immediately.

Use separate accounts for separate jobs

Some practices find it easier to manage cash with several bank accounts, each with a single purpose:

• Operating account: receives deposits and pays vendors.
• Payroll account: funded before each payroll, which makes payroll errors easy to spot.
• Tax account: receives a set percentage of profit each month for estimated payments.
• Reserve account: holds the emergency cushion and is not touched for routine bills.

This does not change your accounting, since all accounts roll up into the same books, but it makes the balance in the operating account a more honest picture of what you can spend.

Help with forecasting

If cash surprises you more than once or twice a year, a forecast and a consistent monthly close usually solve it. Cisor’s dental accounting and bookkeeping teams can set up a cash forecast alongside your monthly financials, or you can request a practice analysis. Call (703) 345-0606 to start the conversation.