Startup and Working Capital

In running a business, it is important to understand the absolute necessity of having access to cash and managing its flow through your enterprise. Working capital is the money that one needs to keep on the office lights, pay salaries, and continue to stock inventory. A company without a secure source of actively managed cash will soon go out of business.

Sources of Working Capital

In general, there are two forms of capital for any given business, debt and equity. Only one applies to most radiation oncology practices—debt. Banks are the traditional lenders and sources of debt for businesses. The bank offers credit at an interest rate and sets terms for its repayment. In radiation oncology, vendors often have lease programs for equipment. In general, lease agreements are easier to execute because they have lower credit requirements. In addition, there are specialty lenders with expertise in lending to radiation oncology enterprises who are able to achieve, through an understanding of the industry, terms for credit that fit the needs of a practice.

When approaching a bank for a loan, a personal guaranty from the business owners is solicited as a cosigner of a loan in addition to the proposed business. This gesture is seen as a vote of confidence in the practice by its owners and can secure the most favorable terms for the company. Other formalisms in- involved in obtaining optimal terms from a bank for a loan are pro forma documents. Pro forma documents provide the best guess of expected business activity in the future. Examples of pro forma documents include sample cash flow statements, expenses, invoices, and possible losses and liabilities. It is important to have at least three to six months of costs available from creditors. A typical amount for a radiation oncology practice would range from $100,000 to $250,000.

Another important source of cash in radiation oncology is in the form of accounts receivable (AR) loans. These are loans given by specialty lenders on accounts receivable (work already done and not yet reimbursed). This gives the practice flexibility by reducing the amount of capital tied up in delayed accounts and past-due accounts.

Employer Tax ID Number (EIN)

The taxpayer identification number or EIN is used by the Internal Revenue Service to track a business entity and is required for the following reasons (see http://www.irs.gov/businesses/small.html):

• You have employees.
• You operate your business as a corporation or a partnership.
• You file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms.
• You withhold taxes on income, other than wages, paid to a nonresident alien.
• You have a Keogh plan.
• You are involved with any of the following types of organizations: trusts, except certain grantor-owned revocable trusts, IRAs, estates, real estate mortgage investment conduits, nonprofit organizations, farmers’ cooperatives, plan administrators

Payroll

Employees can be paid weekly, biweekly, monthly, hourly or salaried (exempt). There are numerous federal rules that require income tax withholding, which begins when the employee fills out a W-2 form. In addition to income tax withholding, Social Security must be withheld at a rate of 6.2 percent up to $94,200. The employer must match an additional 6.2 percent to the employee contribution. Also a Medicare tax is withheld at a rate of

1.45 percent without limit, which an employer must also match. It is generally good advice to have a payroll expert do the proper deductions at the proper times in order to ensure that your practice is in full compliance with federal laws. ADP, Compupay, and Paychex are companies that provide this service. These areas are complex and require considerable attention to detail, as well as awareness of the fact that specific requirements might change from time to time in the foreseeable future.

It is best to have experts do payroll deductions for your company!

Purchasing

Purchasing represents an important component of a viable practice. It stands to reason that you should ensure that the person you hire is capable and should be at a managerial level. In addition, if you assign one person to the task of purchasing, tracing the root cause of possible errors and unexpected expenses found during a monthly cost analysis becomes a simpler administrative task.

It is important to know your assets. Assets come in three types:

• Current assets: Cash, accounts receivable, inventories, and pre-paid expenses
• Fixed assets: Medical equipment, computers, and imaging devices
• Other assets: Security deposits on a lease, obsolete equipment

Accounts Payable

It is important to develop solid relationships with a few primary vendors. This practice will allow you to ensure an adequate supply of consumables and other assets. In addition, a familiarity with regular vendors will allow you to negotiate volume discounts and ask for favorable payment terms, such as a forty-five-day payment window. In order to better manage cash flow, it is advisable to centralize accounts payable. Create a chart of all accounts and categorize all expenses incurred by the practice. Every month the management team should analyze the monthly costs to determine if further savings or efficiencies could be gained in the future.

Pearl—never pay an outstanding account balance in less than thirty days. Cash management requires attention to the details; accounts receivable, AR loans, and credit lines all eat away at the bottom line. A simple solution is to preserve cash until payments must be made in order to minimize the cost of credit.

Accounting Basis Cash vs. Accrual

There are two accounting methods: the cash method and the accrual method. The cash method reports income and expenses as it is received and as they are incurred. The accrual method requires the reporting of income when you perform a medical service, even though you have not yet received payment for your services. Similarly, the accrual method reports expenses when they are performed or received in contrast to the cash method, which reports an expense when it is paid. Small physician practices almost always use the cash method of accounting. The accrual method is required for businesses with incomes over $5 million or if you have a substantial inventory.

For example: You bill a patient $100 today. With the accrual method, you report a $100 income today. With the cash method, you report income WHEN (and IF) you collect.