Avoiding “RBMs” – 4 Simple Rules

Tell me if you have heard this story:

Business owner has 4 good months where cash flow is good, bills are getting paid, creditors are not calling, a little bit of money is accumulating in the checking account and everything at the practice seems to be calm.

Then it hits.

The RBM—the REALLY BAD MONTH. And not just any bad month but the kind of month where you are 20-40% under your make/break number. The anxiety and the confusion sets in along with the dark little thoughts and invalidations of oneself: How am going to pay my bills? Do I need to tap into my credit lines? There go my reserves. How did I not see this coming?

The main premise of this article is the glaring issue that it takes a considerable length of time to come back from an RBM.

In financial planning, there is a concept called the mathematical catch game. The basic theme is that for every % point you lose in an investment, you must gain MORE than that % back just to get back to even. For example, if you have $100,000 in an investment account that goes down 20%, then theoretically you would need to GAIN 25% just to get back to even. To make it simpler and more impactful, if you lose 50% of a $100,000 account you would have $50,000. If you make 50% the very next month your account is only at $75,000 ($50,000 x 1.5 = $75,000). The point being is that it takes a MUCH longer time frame to come back from financial losses.

So let’s apply this to your practice, which just laid an egg and is 30% under for the month.

REALLY BAD MONTH (RBM)
$70,000 Income
$100,000 Make/Break
($30,000) Deficit

Following Month
$105,000 Income
$100,000 Make/Break
($25,000) Deficit

Following Month
$110,000 Income
$100,000 Make/Break
($15,000) Deficit

Following Month
$105,000 Income
$100,000 Make/Break
($10,000) Deficit

Following Month
$110,000 Income
$100,000 Make/Break
($0) Deficit

In this very simple scenario, it took the business 4 months just to get back to even from the RBM.

By the way, this scenario almost never happens. Most practice owners further their debt, lower their profits and payments to themselves, and resign themselves to the fact that they will not hit their goals for the year. They lower their targets and never really inspect why they had such a bad month and use the excuse of weather, lack of appointments, seasonality issues, lack of good help, flu or sickness, and countless other excuses. Unfortunately, none of those excuses can be used as currency to pay the creditors who haven’t paid in 4 months.
Highest-ever and big-income months are great and I absolutely love watching practices hit their production goals, but I would much rather see you AVOID the REALLY BAD MONTHS. They absolutely kill a small business that is so reliant on consistent cash flow. RBMs push you to a place where it’s very difficult to get unstuck—both financially and emotionally.

There is no way to avoid an RBM, it’s going to happen eventually, it just shouldn’t set you back 4 months. The good news is, you can actually see them coming. All you have to do is plan. Here are four simple rules to help you better handle an RBM so it doesn’t put you at risk of financial ruin.

  1. Know your numbers. You must know how much your business needs to operate each month. I am still flabbergasted by the number of practice owners who do not understand this concept.
  2. Track your income every day. Yes. You can say running a business is not all about the money right up until the point where “you ain’t got none,” then it becomes all about the money. Pay attention to your money lines daily.
  3. Have heavy reserves. I do understand that a private practice will have an RBM every once in a while. The impact of them can be lessened if you have 1-3 months of business reserves sitting in a business checking account.
  4. React quickly. If you see that an RBM is on the way, don’t watch the Titanic sink, do something about it! Ramp up your marketing, get patients scheduled, sell your services, and bill and collect quickly.

Our Private Practice Millionaire Club members absolutely know their numbers and our advisors are trained to make sure that a practice owner NEVER STOPS paying attention to his or her income lines. Keeping business owners’ attention on their money and guiding them to make smart financial decisions is one of the most valuable things our team does to help our clients achieve success.

Advisory Services offered through Econologics Financial Advisors, LLC., A Federally Registered Investment Advisor.