Determining working capital

Running a business can be full-throttle. The sheer volume of expenses requires constant attention, from taxes to utility bills and staff wages. This can make working capital, or net working capital (NCW), difficult to stay on top of.

Working capital is a valuable tool for working out what a business can safely spend. For dental practice owners, previous years, such as those in the pandemic, saw a greater struggle to break-even owing to supply chain issues and fewer appointments. Now, with an economy that shrinks then grows at the flip of a coin, dental practice owners must ensure that they have a positive NCW.

Breaking it down

Working capital is a measurement that subtracts the current total liabilities of a business from the total current assets. Any money left over ensures a positive NCW. Current total liabilities are comprised of all the debts that the dental practice will owe in the next 12 months. These include:

Accounts payable – unpaid vendor invoices for supplies, utilities, property taxes, rent etc.
Staff wages – often depending on payroll timing
Current portion of long-term debt – short-term payments for a long-term debt
Accrued tax payable
Unearned revenue – in the event that a company fails to complete a service (i.e maintenance work) it should return capital to the dental practice
Authorised payments to shareholders

There are a similar number of categories that fall into the current assets of a dental practice – the bulk of which is all the cash and cash equivalents on hand. Among the inventory of assets there may be outstanding patient payments, unsold goods (such as oral hygiene products in the practice) and treatments in progress. Other assets include claims to cash for items and treatments sold on credit, prepaid expenses and short-term deferred tax assets.

For example, if the dental practice has £50,000 in the business bank account and numerous patients owe a collective £10,000 in combined treatment payments, that gives the practice £60,000 in current assets. If the practice has £40,000 in current liabilities, covering wages, debts, utility costs etc., then that leaves a working capital of £20,000. This is the amount that can be liquidised within a 12-month period.

A financial thumbs up

If the working capital is positive, then this gives the dental practice owners a degree of flexibility. From paying off debts or investing in future growth, financial stress is reduced. This may also prompt wage increases. However, a high working capital can also emphasise that the dental practice is not investing excess funds and has too much inventory.

When things are negative

If the calculation finds that current liabilities are higher than the current assets, then the business may be in short-term debt, creating payment problems and inhibiting growth. Periods of higher cost, such as paying for maternity/sick leave and the subsequent locum cover at the same time, can be a challenge, which is why applying for working capital finance can help. This maintains a healthier cash flow by giving dental practices immediate relief in managing their operational costs. Lenders are often able to provide a decision within 24-48 hours, helping business owners better manage their financial position rather than waiting for too long.

Get the support needed

Working capital is a reliable way of working out the financial stability of a dental practice, but it does have a limitation: it’s always changing. Assessing all the incoming and outgoing costs and having the latest figures is time-consuming; the financial information accumulated is likely to have changed again before it has been finalised. As such, working capital is more of an estimate rather than an exact measure.

For dentists looking for support and guidance with managing their business, the team of independent financial advisers at money4dentists can assist, helping work out current liabilities and assets. Able to step in and reduce the stress for dentists, the money4dentists team can also manage working capital finance options, finding the best deals by making sure everything is accounted for in the initial application. Leave the tricky calculations to money4dentists and streamline your finances today.

The costs and income of a dental practice can vary month to month, and monitoring working capital is a useful indicator for the next stage of the business, helping to determine if investment is feasible or if extra financial support is needed in the short-term.