Direct answer
As of August 2026, a medical practice should set working capital from a cash-flow model rather than a generic number of months. The model should reflect payer and patient collection timing, payroll cadence, fixed commitments, debt service, taxes, planned investments, owner distributions, seasonality, and a downside scenario.
Separate profitability from available cash
A profitable medical practice can still face a cash shortage when collections arrive after payroll, when debt principal is not shown as an income-statement expense, or when owners distribute cash needed for taxes and operations. Reconcile profit to cash each month.
Build a rolling cash forecast
Start with available bank cash and expected collection dates, then schedule payroll, benefits, rent, vendors, debt, taxes, capital purchases, and owner payments. Update the forecast with actual results and known changes instead of rolling forward stale assumptions.
| Cash-flow input | Question to model |
|---|---|
| Collections | When will payer and patient cash arrive, net of denials, refunds, and contractual adjustments? |
| Payroll and benefits | Which dates and amounts are fixed, variable, accrued, or subject to owner decisions? |
| Occupancy and vendors | Which commitments continue even if patient volume or collections fall? |
| Debt and capital spending | Which principal payments and planned purchases use cash but do not reduce current operating profit? |
| Taxes and owner payments | What is reserved for payroll tax, income tax, distributions, and personal obligations? |
| Downside case | How long can the practice meet obligations if collections slow or a provider cannot work? |
Define an operating floor and escalation rule
Set a documented cash floor tied to the practice’s payment cycle and risk. If forecast cash approaches the floor, management should know which expenses, distributions, hiring decisions, or financing discussions require review.
Stress-test the events that matter to this practice
Model slower collections, provider leave, payer interruption, unexpected equipment needs, hiring, reimbursement changes, and a tax payment. Use the medical-practice cash-flow forecast guide to turn the reserve decision into a recurring process.
Primary sources
Frequently asked questions
Is three months of expenses always enough working capital?
No. A month-based rule can be a starting reference, but the practice should model its own collection cycle, cost structure, debt, concentration risks, and access to financing.
Should tax reserves count as operating cash?
Treat designated tax funds separately in management reporting so the same dollars are not assumed available for operations and taxes.
Can a line of credit replace cash reserves?
A line can support liquidity, but availability, covenants, interest, renewal risk, and lender discretion should be tested before treating it as guaranteed cash.