Now more than ever, knowing your cash burn is crucial to surviving uncertainty.

Dentistry has been a rather unique industry in that it has traditionally been insulated from economic downturns. Dental organizations, particularly those with a healthy hygiene program have proven to survive during recessionary periods, evidenced by the financial collapse of 2008. Although full cosmetic dentistry practices suffered a bit, those practices that focused on traditional “bread and butter” dentistry survived and even thrived.

This all changed in 2020.

COVID-19 brought a challenge that the industry had never seen before, and few were prepared. Many dental organizations reserved minimal working capital and cash reserves. This was based on the premise that the production from yesterday would pay the bills of today.

When COVID hit, dentistry first saw the production cease as a result of local shutdowns. However, there were many fixed expenses that were still due, despite the mandated shutdowns. This resulted in a need for a level of planning and financial competency that had not been required to be successful in the industry prior.

Fortunately, the federal government was responsive in pushing out the Paycheck Protection Program (PPP) to help most dental organizations from a cash flow standpoint before the entity was at risk. As the virus has persisted, most organizations have realized that we now live in a world where nothing is guaranteed, there are decisions out of our hands in being able to provide patient care, and there is always the risk of future shutdowns. There are also no guarantees of government intervention in a timely manner to bail out organizations for such unforeseen crises. Therefore, it is crucial for organizations to truly evaluate and understand their “Burn Rate”.

The burn rate is the rate at which a company goes through its cash, whether its cash on hand or its access to cash.

Determining Cash Inflows

Cash inflows can be projected when the dental offices are open, but when they’re forcefully closed for patient care, it becomes much more difficult.

Typically, insurance payors will pay any outstanding insurance receivables, but there is potential to slow-pay claims from a cash flow perspective. On top of this, private payors are facing uncertainty in their own careers and are typically slower to pay outstanding amounts. Complicating this, many team members in charge of collecting receivables are empathetic to the struggles of private payors and often avoid actively trying to collect on outstanding amounts.

Determining Cash Outflows

Cash outflows include all of the direct variable costs of running a practice, such as dental supplies and lab fees as well as fixed costs that are contractual in nature, including rent and facility expenses and debt service.

Payroll costs are the largest costs of any dental organization and are typically a mix of fixed and variable. Failure to address these costs in a timely manner based on what government resources are available to the company or employees will ultimately be catastrophic, but these are the most difficult decisions given that they involve people. Payroll costs can be planned and communicated in a timely manner to lessen the impact on your team members. Many of the other fixed costs can be negotiated or deferred in times of crisis, but there are no guarantees.

It is prudent to ask yourself which of your operating costs could be delayed, negotiated, or deferred.  

To survive in these uncertain times, an organization should have the answers to the following set of questions:

• What is your cash flow projection, week by week, for the next 14 weeks?
• Are there any weeks where your cash outflows come dangerously close to your inflows?
• Do you have a plan for a cash flow shortage? Do you have access to cash?
• What is the status of your current banking relationship? Are you able to borrow money?
• What variable costs are within your control?
• If you can’t make your lease payments, are you at risk of displacement?
• Have you asked your vendors for payment term extensions? Are you fully leveraging the relationships you have?
• Are you being as conservative as possible in your cash flow projections to ensure the safety of your organization and your team members?

The COVID-19 crisis has forced most organizations to reevaluate their approach to cash on hand and their banking relationships.

More importantly, it has forced organizations to “test drive” responding quickly to staffing changes when factors outside of the company’s control affect its ability to offer patient care. Understanding the exact timing of an organization’s material cash flow events is crucial to the long-term feasibility, as well as the short-term management of people and relationships to help the organization recover from shutdowns and not as we put it, “Burn, Baby Burn”.

For a historically cottage industry like dentistry that has been able to manage the business based on simply looking at the bank balance, the dental organizations that survive future curveballs will be those that evolve to understand all elements of their cash flow.

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