Recent news articles have highlighted companies’ ability to accumulate large quantities of cash − Berkshire Hathaway has reached an all-time high of $128 billion in cash-on-hand (1). Tech companies have even more cash-on-hand: Apple has fluctuated between $210 billion and $245 billion this year (2), and Microsoft ended the third quarter with almost $134 billion of cash-on-hand (3).
But what do these record breaking figures of cash reserves have to do with independent medical practices?
Understanding the financial performance of your business is vital to your success, and one key financial indicator often overlooked by practices is Days Cash On Hand. Used by hospitals for decades primarily to maintain their bond status rating, Days Cash on Hand provides a snapshot into your ability to meet obligations in the short term if all your inflows of cash were somehow interrupted.
Worst case scenarios such as natural disasters from fire, flood, or earthquakes can have dire consequences on the cash flow of your practice. However, fluctuations in patient patterns, inclement weather, payor lag, or unexpected maintenance can also lead to practices feeling squeezed when large expenses such as pharmaceutical orders, supply purchases, or even payroll come due. Practices tend to experience this crunch in January as well, after year-end distributions have been made to shareholders and patients have a fresh new deductible to work up to.
While hospitals and tech companies maintain cash balances that could cover operating expenses for upwards of a year if needed, private practices should understand their cash flow needs and adjust their Days Cash On Hand amount accordingly. Used in conjunction with other key financial indicators from the balance sheet, income statement, and practice management system, Days Cash On Hand can keep you informed on the financial security and performance of your practice.
How to calculate:
Days Cash on Hand = (Cash + Cash Equivalents) / (Total Operating Expense/365)
(1) Friedman, Nicole. “Berkshire Hathaway’s Cash Pile Hits a Record.” The Wall Street Journal, Dow Jones & Company, 2 Nov. 2019, www.wsj.com/articles/berkshire-hathaways-earnings-fall-as-unrealized-investment-gains-decline-11572696532.
(2) Palmer, Annie R. “Apple Now Has $210.6 Billion in Cash on Hand.” CNBC, CNBC, 30 July 2019, www.cnbc.com/2019/07/30/apple-now-has-210point6-billion-in-cash-on-hand.html.