How to Choose the Right Cash Reserve for Your Therapy Practice

Aug 10

Written By Abby Nerderman

A 6-factor score that turns "we have $220,000 in the bank" into an actual answer.

A practice owner said this to me on a call last spring.

"We have $220,000 in the bank."

"Great."

"...is that enough?"

"I honestly don't know."

I wasn't avoiding the question. $220,000 means nothing sitting by itself. Here's what actually matters. Her practice spends, every month:

Payroll: $52,000
Rent: $4,200
Software: $900
Insurance: $1,100
Marketing: $1,800
Everything else: $5,000

That's $65,000 a month. So $220,000 is 3.4 months of operating expenses.

Now we can have a real conversation.

Get this wrong and one of two things happens:

You delay profitable growth because you're scared to spend.
Or you grow too quickly and run out of cash at exactly the wrong moment.

Where the "3 to 6 months" rule runs out

A 90% private-pay practice in a month-to-month office share and a practice billing 5 insurance payers on a 5-year lease can spend the identical $65,000 a month as the above example. Three months of cash is comfortable for one and thin for the other. The right reserve depends on the business you're running.

The Therapy Practice Cash Reserve Score

Give yourself 0, 1, or 2 points for each. It takes about ten minutes with your P&L open.

1. Payer mix. How much of your revenue comes through insurance?

0: mostly private pay, collected at time of service
1: roughly half and half
2: mostly insurance, or concentrated in one or two payers

Insurance money arrives on the payer's schedule, and one panel changing its process can stall a big chunk of your revenue at once.

2. Payroll intensity. Payroll as a share of total monthly expenses.

0: under 50%
1: 50% to 70%
2: over 70%

The more of your expenses tied up in payroll, the less flexibility you have if collections slow down.

3. Hiring plans. What's coming in the next 6 months?

0: no hires planned
1: one hire
2: two or more, or a new location or service line

Every hire costs you full freight for 3 to 5 months before that clinician's caseload is full enough to cover them.

4. Fixed overhead. Costs you can't turn off inside 30 days. Lease, loan payments, salaried admin.

0: under 15% of expenses, month-to-month or short lease
1: 15% to 30%
2: over 30%, or a multi-year lease with a personal guarantee

These bills arrive whether or not you had a good month, so they set the floor on how bad a slow quarter can get.

5. Owner dependence. How much revenue rides on your own caseload?

0: under 15%
1: 15% to 35%
2: over 35%

If most of the revenue depends on you seeing clients, then illness, burnout, or a month spent running the business turns into a cash flow problem.

6. Debt service. Loan or line of credit payments.

0: none
1: under 5% of monthly expenses
2: over 5%, or a line of credit you haven't paid down in 6 months

Debt payments compete with payroll for the same dollars, and they don't pause when collections do.

Add it up. Then find your band:

Score Risk profile Reserve target 0 to 3 Lower risk 2 to 3 months 4 to 7 Moderate 3 to 4.5 months 8 to 12 Higher risk 4.5 to 6 months

One important caveat, this isn't a formula that predicts the future. It's a framework for making better decisions based on your practice's actual risk profile.

Quick calculation:

Monthly operating expenses × reserve months = target reserve

Example:

$65,000 × 4 months = $260,000

Back to the $220,000 practice. Insurance-heavy (2), payroll at 80% of expenses (2), one hire planned (1), modest fixed overhead (1), light caseload of her own (1), no debt (0). Score of 7, which puts her at 3 to 4.5 months, or $195,000 to $292,500.

She's funded, sitting in the bottom third of her range. So she can make that one hire. A second would push her under.

The cost of over-saving

A client came to me wanting to hire 2 therapists. She'd wanted to for almost a year and kept not doing it, because she didn't think she had enough cash.

Four clinicians, about $38,000 a month in operating expenses, $190,000 in the bank. Five months of reserves. Her score came out to 4, putting her target at $114,000 to $171,000. She was sitting $19,000 to $76,000 above her own ceiling, and that money was on the bench.

She'd already run both hires against their fully loaded cost and both cleared. So the modeling wasn't the problem. The reserve fear was.

Hiring is a ramp: 3 to 4 months to a full caseload, plus paneling delays and billing lag on top. Call it 5 months before a new hire meaningfully contributes cash. She was always going to walk that ramp. She just walked it 12 months later than she could have.

Waiting cost her less in year-one profit than you'd expect, because a clinician's margin over fully loaded cost stays thin until the caseload fills. The expensive part was the 12 months of capacity she never built, and the referrals she turned away while $76,000 sat idle.

Two other tells you're over-saving: your balance has climbed 12 straight months while headcount stayed flat, or you're underpaying yourself to keep it up. Check that second one against reasonable comp with your tax pro.

The cost of under-saving

Run the other direction. Same $65,000-a-month practice, only 2 months banked. That's $130,000. She hires 2 clinicians anyway.

Fully loaded, each one runs about $7,500 a month once you add payroll taxes, EHR and software seats, billing, and admin support on top of the comp split. That's $15,000 a month for the pair, starting the day they do.

3 to 5 months to a full caseload, so $45,000 to $75,000 invested before they're profitable
Paneling delays and billing lag stretch that out further
New monthly operating expenses once both are full: $80,000

Reserve after the ramp: somewhere between $70,000 and $90,000. Against an $80,000 burn, that's about 1 month.

Now add the thing that always happens. Insurance slows by 3 weeks, so roughly two thirds of a month's deposits land later than planned. Payroll is still every other Friday. It doesn't care.

At 1 month of reserve, that's the week you're calling a bank you have no relationship with, putting payroll on a credit card, or asking a clinician to wait. The last one costs you more than money.

Both owners made the same move. They let the bank balance make the call, when it's one input out of six.

Why the number moves as you grow

At 2 clinicians, you are the reserve.

Overhead is small. Some clinicians may be 1099s paid on collections, so your biggest cost moves with your revenue. If things get tight, you see more clients and skip your own draw. Those levers are why a 2-clinician practice runs comfortably on 2 or 3 months.

At 10 clinicians, every one of those levers is gone. Payroll is 70% to 80% of a much bigger number, most of it W-2 salary landing every other Friday whether the payers cooperate or not. There's a lease with your name on it, salaried admin, and a caseload of your own that's small or gone.

So the expense base goes up, and the percentage you need to hold goes up with it.

3 clinicians, $28,000 a month, 2.5 months = $70,000
8 clinicians, $65,000 a month, 4.5 months = $292,500

Headcount up 2.7x. Reserve up 4.2x. Grow doesn't just make your reserve bigger, it changes how much risk your practice carries. Which is why the number you set two years ago is probably wrong today. Re-run the score when something changes: a new clinician, a lease signing, new debt, a shift in payer mix.

Avoid the bank balance mistake

Your bank balance is not your reserve.

Some of it already belongs to someone else. Payroll taxes withheld but not remitted. Estimated taxes owed but not sent. Payouts from last month's deposits to 1099 clinicians. Strip that out first, and what's left is the number you divide by monthly expenses. (Work the tax piece through with your tax professional, since what you owe and when depends on your entity and state.)

Spend 20 minutes this week

Pull 3 months of P&L from QuickBooks Online. Average your operating expenses, strip out one-time items, and cross-check payroll against Gusto for the fully loaded number.
Subtract what's already spoken for from your bank balance, then divide. That's where you stand.
Score the 6 factors. Find your band.
Build a 13-week cash forecast in Google Sheets, using real collection timing from SimplePractice or TherapyNotes.

Then answer the question that settles it: if your reserves fell to 2 months tomorrow, would you still make the hire?

If yes, you're deciding based on the business. If no, name the factor driving the fear. It's almost always one specific thing, and once you can point at it, you can fix it.

When your P&L and your reserve disagree

Here's what usually happens right after an owner runs this math. The P&L says profitable, the bank says the reserve is shrinking, and both are true at once. Your practice earns money when the sessions happen and receives it when the payers get around to it. Two different dates, sometimes 6 weeks apart, handled differently depending on which report you're reading.