How Much Working Capital Does an Internal Medicine Practice Need?
Working capital can be an important part of managing an internal medicine practice. Physicians need sufficient cash available to cover everyday operating expenses, particularly when revenue and expenses do not occur at the same time.
This can be especially important for new practices, growing practices, and physicians who have recently acquired an existing practice.
For physicians considering internal medicine practice financing, understanding working capital needs can help determine how much capital may be appropriate for the business.
Here are six important factors to consider when determining working capital needs for an internal medicine practice.
1. Payroll Is a Major Working Capital Expense
Employee compensation can represent one of the largest recurring expenses for an internal medicine practice.
Depending on the size of the practice, payroll may include:
- Physician compensation
- Nurse and clinical staff wages
- Medical assistants
- Front-office employees
- Billing staff
- Administrative employees
- Employee benefits
Payroll generally needs to be paid according to a regular schedule regardless of when patient or insurance payments are received.
Physicians should consider payroll requirements when determining how much liquidity the practice should maintain.
2. Rent and Facility Expenses Need to Be Considered
An internal medicine practice may have recurring facility-related expenses such as rent, utilities, property expenses, maintenance, and insurance.
For practices that own their commercial property, expenses may instead include mortgage payments, property taxes, insurance, maintenance, and other ownership costs.
These recurring obligations should be incorporated into the practice’s working capital planning.
3. Medical Supplies Can Affect Cash Flow
Medical practices need to maintain an adequate supply of the products and materials required to operate.
Depending on the practice, expenses may include:
- Medical supplies
- Office supplies
- Personal protective equipment
- Diagnostic supplies
- Cleaning and sanitation products
- Other clinical supplies
Supply expenses can vary from month to month, so physicians should consider both normal and unexpected purchasing requirements.
4. Insurance and Other Recurring Expenses Matter
Working capital planning should include recurring expenses beyond payroll and rent.
These may include:
- Professional insurance
- General business insurance
- Technology subscriptions
- Electronic health record systems
- Billing services
- Accounting services
- Legal and professional services
- Marketing
Although individual expenses may seem relatively small, they can add up significantly over the course of a year.
5. Insurance and Patient Payments Can Affect Timing
Medical practice revenue does not always arrive at the same time services are provided.
Insurance claims may take time to process, and patient payments may also be collected on different schedules.
This creates a timing difference between when the practice incurs an expense and when it receives the related revenue.
Working capital can help provide liquidity during these periods.
Physicians should evaluate the practice’s historical collection patterns and accounts receivable when determining appropriate cash reserves.
6. New Practices May Need More Working Capital During the Early Stages
A startup internal medicine practice may require additional working capital because it needs time to establish a patient base and generate consistent revenue.
Early expenses may include:
- Employee payroll
- Office rent
- Marketing
- Medical supplies
- Insurance
- Technology
- Utilities
- Other operating expenses
Revenue may increase gradually as the practice establishes its patient base.
For this reason, physicians starting a new practice should consider working capital separately from the initial cost of opening the office.
How Much Working Capital Should an Internal Medicine Practice Have?
There is no universal working capital amount that is appropriate for every internal medicine practice.
The amount needed can depend on:
- Practice size
- Number of employees
- Monthly operating expenses
- Patient volume
- Revenue collection timing
- Insurance reimbursement patterns
- Existing debt obligations
- Practice growth plans
Rather than relying on a standard dollar amount, physicians should evaluate the practice’s actual monthly expenses and expected cash flow.
Working Capital for an Acquired Internal Medicine Practice
Physicians purchasing an established internal medicine practice should also consider working capital as part of the acquisition budget.
The practice may have existing revenue, but the transition to a new owner can still create additional expenses.
A buyer may need capital for:
- Payroll
- Inventory and supplies
- Technology upgrades
- Renovations
- Marketing
- Staffing changes
- Other transition expenses
Working capital requirements should be evaluated alongside the practice purchase price and other acquisition expenses.
Can Working Capital Be Included in Practice Financing?
Depending on the financing program, lender, borrower qualifications, and intended use of funds, working capital may potentially be included in a broader business financing request.
Physicians should determine the amount of working capital needed before finalizing a financing request.
Including appropriate working capital in the overall financing plan may help a practice maintain liquidity while managing its normal operating expenses.
How Can Physicians Estimate Working Capital Needs?
One approach is to create a detailed monthly cash-flow projection.
Physicians can estimate:
- Monthly revenue
- Payroll
- Rent or mortgage payments
- Medical supplies
- Insurance
- Technology expenses
- Debt payments
- Other operating expenses
Comparing expected cash inflows with cash outflows can help identify periods when additional liquidity may be necessary.
A financial professional can also help physicians develop realistic projections based on the specific practice and circumstances.
Final Thought
Working capital can play an important role in the financial health of an internal medicine practice. Payroll, rent, medical supplies, insurance, technology, and other operating expenses need to be paid even when patient and insurance payments are still being collected.
There is no single working capital amount that applies to every practice. Physicians should evaluate their monthly expenses, expected revenue, collection timing, growth plans, and other financial obligations when determining how much liquidity may be appropriate.
Whether you’re starting an internal medicine practice, acquiring an established practice, or expanding an existing location, planning for working capital can help you prepare for the ongoing financial needs of the business.
