Medical Practice Overhead and Cash Flow: Read Them Together

The schedule is full. Payroll is covered. The monthly report shows revenue holding up. Yet there is less room in the bank account than leadership expected.

That combination does not tell you whether the practice has a spending problem, a collection-timing problem, or both. A cost percentage alone cannot settle it. Neither can the bank balance.

For an independent medical practice, a useful overhead analysis connects three views: the cost of running the practice, the timing of collections, and the cash obligations coming next. The point is not to replace leadership's judgment. It is to give that judgment better evidence.

Start with a definition, not a target percentage

“Overhead” can mean different things in different reports. Before comparing percentages, identify which expenses are included and what they are divided by.

For the operating review in this article, use:

Operating overhead ratio = included operating expenses ÷ collections for the same period × 100.

That is an analytical convention, not a universal accounting rule. A gastroenterology practice-finance toolbox from the American College of Gastroenterology uses actual collections as the denominator for expense ratios. It is a useful example of a defined measure, not a benchmark for every specialty. 1

List the inclusions: support-staff wages and benefits, occupancy, billing expense, supplies, technology, insurance and professional fees. State how physician compensation and drug or device acquisition costs are treated. Keep the definition consistent across periods.

If one report includes physician compensation and another excludes it, their overhead percentages are not directly comparable. If one uses collections and another uses accrual revenue, the denominator can also change the interpretation.

A higher ratio does not establish that spending rose

Consider a fictional example, not a client result or industry benchmark:

The ratio rose by about 6.7 percentage points. Expense dollars did not move. Collections fell by $40,000.

That does not prove the collections decline is temporary, recoverable or caused by a billing issue. It does show why an immediate across-the-board cost cut would be a conclusion ahead of the evidence.

Investigate whether the difference reflects payment timing, lower activity in prior periods, changes in payer or service mix, adjustments, or a collection-workflow delay. Compare several months and the same period last year. Then check whether expense growth is also present in specific categories.

Profit and available cash answer different questions

The accounting basis matters. Under the accrual method, income is generally reported when earned, regardless of when payment arrives. Under the cash method, income is generally reported when received. The IRS explains this distinction in Publication 538; the rules contain exceptions, and your accountant should interpret how they apply to your practice. 2

In an accrual report, an increase in receivables can support reported revenue without putting money in the bank that month. Even a cash-basis profit figure is not a complete explanation of the bank balance: equipment purchases, loan principal payments and owner distributions can use cash without being ordinary operating expenses in the same way as payroll or rent.

An operator should therefore reconcile the movement in cash, not infer it from reported profit. A practice-specific finance review in Physicians Practice similarly recommends reading the income statement and balance sheet together rather than looking only at net income. 3

Build a short cash bridge

Start with the bank's opening balance, then explain the closing balance:

Opening cash + cash received − cash paid = closing cash.

Use actual cash movements, and distinguish operating receipts from borrowing or owner contributions. Separate routine operating payments from equipment purchases, debt principal, tax payments and owner distributions. Reconcile transfers so movement between practice accounts is not mistaken for new cash or a new expense.

The bridge answers what happened. A near-term cash forecast answers what may happen next. Put expected receipts beside payroll dates, rent, major vendor payments, debt service and other known commitments. A rolling 13-week view can be a useful planning format; it is not a required standard or a promise of forecast accuracy.

Working capital and cash are also different. Working capital is current assets minus current liabilities, which can include receivables rather than immediately spendable money. Collection speed and supplier-payment timing affect liquidity. 4

Edison Breakwater's operator perspective: connect the reports before choosing the lever

Edison Breakwater describes its work as starting with a practice's actual data and KPIs across access, capacity, revenue cycle, staffing and operations. That is the perspective behind this review: a financial movement deserves operating context before it becomes a recommendation. 5

The question is not simply, “How do we lower overhead?” It is, “What changed, what evidence explains it, and which decision is actually available?”

Consider three different reads:

• Expense dollars are flat; collections slipped. Investigate the timing and composition of collections before assuming the cost structure is the cause.
• Labor dollars rose; completed activity stayed flat. Review overtime, temporary coverage, vacancies, benefits and role-level workload. A headcount cut is not the only possible response, and the figures alone do not establish overstaffing.
• Operating performance looks stable; cash fell. Reconcile equipment payments, principal repayments, distributions and other nonroutine outflows before treating the decline as operating deterioration.

Each read leads to a different conversation. The useful output is a supported observation, a clearly labeled explanation to test, and an assigned next step. These are analytical examples, not claims about Edison Breakwater client experience or results.

What to bring to the next leadership meeting

An initial review can stay focused:

1. A consistent cost view. Twelve months of expense dollars by category, collections and completed activity, with the accounting basis and exclusions stated.
2. A collection-timing view. Aggregate receivables by age and payer, collection trends and workflow measures such as charge lag or denial follow-up. MGMA treats expense measures and time-to-collect measures separately in its benchmark guidance. Its cited guidance dates to 2020; it is not a current performance target. 6
3. A reconciled cash bridge. An explanation of the bank movement that separates routine operations from financing, investment and owner activity.
4. A forward commitment view. Upcoming cash obligations, expected receipts, and assumptions that could change the forecast.

Close the meeting with one or two questions that someone can answer. For example: “Which payers explain the collection decline?” or “How much of the labor increase is temporary coverage rather than permanent staffing?” Give each question an owner and a review date.

There is no defensible universal overhead target in the sources used here. Specialty, service mix, ownership and cost definitions affect comparisons. A consistent internal trend is often the best starting point; a suitably matched external comparison can add context when its limitations are clear.

Better data should lead to a better operating discussion

Overhead describes a cost relationship. Cash flow describes movement and timing. Reading them together helps leadership distinguish a change in spending from a change in collections, and an operating issue from another use of cash.

AileronMD brings practice-level financial and operating measures into context, with Edison Breakwater's operator-led analysis and discussion. See the complete fictional sample briefing, or continue with the category-by-category overhead analysis and the cash-collection review.

Sources and scope

1. American College of Gastroenterology practice-finance toolbox: an example of expense ratios based on collections, specific to its practice context.
2. IRS Publication 538: cash and accrual accounting definitions, revised January 2022.
3. Physicians Practice: How to diagnose cash flow problems in your practice: explanatory practice-finance guidance, published in 2018.
4. AccountingCoach: Working Capital and Liquidity: general accounting definitions, not medical-practice benchmarks.
5. Edison Breakwater: the company's stated operating approach, not independent evidence of outcomes.
6. MGMA: Understanding cost and revenue data: interpretation of expense and collection-speed measures, published in 2020.

Research and analysis by the AileronMD team. The numerical example is fictional. This article is business and operational analysis, not legal, accounting or tax advice. Use practice-level aggregates, not patient records or PHI. Final decisions remain with practice leadership and its professional advisors.