When it comes to the clinical side of your practice, there are “things you know for sure.”
- You know that a 2.9 potassium indicates your patient is headed for trouble unless proper intervention occurs.
- You know a blood pressure reading of 170/95 needs to be dealt with at once.
- You know an A1c of 14.5 means big trouble unless addressed.
But when it comes to your practice finances, do you have the same level of confidence?
Do you know which numbers you need to track to make the best decisions for your practice? Are you sure you’re collecting the proper data, so you can assess the financial health of your business at any given time?
If your answer is “No”, don’t panic, you are not alone…
Of course, the fact that other small business owners are not sure how to assess the health of their business may not be of much comfort to you (if any).
Rule #1 – Don’t Base your Practice Finances on the Balance in your Check Book!
Many small business owners only have a vague idea which numbers they should track for their business. And that’s the reason why many default to running their business from their checkbook.
Thinking and assumptions go like this…
“Hm, looks like there is plenty of money in the checking account. Well, since there’s lots of cash, we must be doing alright. No need to worry about a thing.”
Unfortunately, things are rarely that simple…
So, what is wrong with this type of thinking? Well, your bank balance is not your true cash balance. Your accounting system will have (should have) your true cash balance.
While it may work to rely on your checkbook to handle and manage your personal finances, business finances differ in a number of ways.
- Business finances are far more complex than personal finances.
- Businesses have to pay employees, benefits, inventory, supplies, technology, and marketing.
- They are required to pay local, state, and federal taxes; they may be required to withhold taxes from employees and submit them at a future date.
- They have to pay for rents or mortgages, utilities, loans, subscriptions, and much more.
Some of these items will be paid ongoing, perhaps monthly. Other expenses will be due later and have to be paid at some time in the future.
And this is where it gets tricky…
If the business is not well informed about all its obligations and corresponding due dates, it is easy to run into problems with cash flow.
In other words…
Businesses may find themselves unprepared to pay the big tax bill or the balloon payment due at end of quarter or at year end, because they didn’t plan for it properly.
Let’s look at some examples.
- If you have employees, you are required to pay federal unemployment taxes, commonly referred to as FUTA. Depending on the size of your business and the amount of taxes withheld, you may be required to deposit this tax each quarter or at the end of the year.
- Mortgage and loan payments may be due and paid each month. However, there may also be a balloon payment that will be due at some future time.
- Perhaps you were able to establish a trade credit with one of your suppliers. The balance on your account will have to be paid at some time in the future – perhaps in 30, 60, or 90 days, depending on the contract.
When you’re obligated to make payments at some time in the future, it becomes more challenging to rely on the balance in your checkbook. It’s more difficult to accurately assess if there is enough cash to cover the payments at any given time.
That’s why it’s so important that your business tracks when and how much you have to pay to cover all expenses and obligations, now and in the future.
At the same time, you also need to track your sources of income and when that income will be available to you. Unless you operate a cash practice, most of your income will come from insurance reimbursements paid to you at some time in the future.
Rule #2 – Closely Monitor Your AR.
Your AR (accounts receivable) represents the amount of money owed to you, for services you already have provided. For as long as you accept insurance reimbursement, the bulk of your income will be tied up in AR for some period of time.
Needless to say, you want that time to be as short as possible!
To help facilitate that, make sure your services get billed for as soon as possible. If there is an issue with coding and the claim bounces back, have a system in place so that issues get resolved quickly.
- Do you know how diligent your staff is in collecting co-pays and cash pays due at time of service?
- Do you know how fast your office is in collecting outstanding debt?
- Do you know how aggressively your billing company is pursuing your AR?
You want your office to collect payments due at time of service, each and every time. If there is outstanding debt, you want your office to follow up without delay.
You want your billing company to go to bat for you. The number of days in AR should be as low as possible, indicating that outstanding balances are collected on at once.
A high number of AR, more days in AR, indicates that balances are not collected on. And the longer balances remain in AR, the less likely you are to collect those outstanding balances.
You also should know the number of days in AR for the various payers you contract with.
If you notice numbers in AR creeping up, you want to be proactive and investigate the reasons why:
- Are there errors in the coding?
- Are there errors in the billing?
- Are there changes in reimbursements you didn’t know about?
Needless to say, you want to know what the average number of days in AR is for your biggest payer. For example, if your biggest payer is Medicare, what is the average number of days in AR for Medicare?
Make sure that your AR is worked regularly, based on a predetermined schedule. And know what your AR numbers are. How much money has been outstanding for 30 days, 60 days, 90 days…?
Know how much of you money is sitting in AR at any given time. You want to pay close attention to this… this is where your income is.
Rule #3 – Closely Monitor Your Expenses and Payables.
Profit for your practice comes from revenue minus expenses. In other words, your profit is the amount of money left after your business pays all expenses and obligations!
Doesn’t it make sense to watch your expenses just as much as you monitor your income?
Your practice could be generating plenty in revenue, but may not show a profit if it doesn’t control expenses. Hence it is important you know what your expenses and obligations are and when they have to be paid.
This applies to all expenses:
- Recurring expenses (utilities)
- Seasonal expenses (vaccines)
- One-time expenses (medical equipment)
- Lease payments (computer system)
- Loan payments (start-up financing)
- Tax payments (local, state, federal)
- Employment-related expenses (wages, benefits)
- Legal, bookkeeping, and accounting expenses
Periodically evaluate your expenses and question how essential or necessary they are. Perhaps you can:
- Lower practice expense by finding a more reasonable supplier – this could be for price or terms.
- Replace an outdated computer system with leased equipment rather than a purchase of a new system.
- Refinance a loan at a more favorable interest rate, resulting in lower payments.
The point is to pay attention to your expenses. Know how much you’re paying for which expense. It’s important to know and keep track of when expenses have to be paid throughout the year.
As challenging as it may be, try to keep your practice expenses as low as possible without sacrificing the quality of service you provide.
Here is what to do next:
Remember, you can’t improve what you don’t track. And you can’t hit a target you can’t see!
Just think of your patients… it would be next to impossible to create any lasting change if you wouldn’t track A1c or blood pressure.
Well, the same is true for your business. You must track your numbers if you want to stay on top of things and grow your business.
The way to accomplish this is not written in stone and doesn’t have to be complicated. While it is totally up to you, I do have a few suggestions I’d like to share with you.
While is seems that there is an endless amount of data you could track, there are some numbers that are more important than others. These are the numbers you want to pay extra attention to.
- Track the number of patients you see each day, get totals at the end of the week. Monitor if the number is growing, going down, or staying the same. Look for trends… you don’t want any surprises. The number of patients you see in your office and the type of service you provide forms the basis of your income. That is the reasons you want to keep track of this number.
- Track your AR as discussed earlier. Get weekly reports from your billing company or in-house biller. Monitor days in AR and look for trends… are days decreasing or increasing? Remember, this is where the bulk of your income “lives” for a period of time. You want this time to be as short as possible. Your goal is to have your income “live” in your bank account!
- If you notice a problem, talk to your billing company at once. If the issue does not get resolved, don’t ignore it and don’t wait too long. Do not be afraid to switch billing company, even though it is a headache and time consuming. Proper and timely billing can make or break your practice.
- Track your expenses and obligations. Know when ongoing and one-time payments are due. Make sure all bills are paid on time. While someone else may do this for you, ultimately it is your responsibility. The buck stops with you!
- Make sure your business data gets recorded on a regular basis and that all accounts get reconciled as scheduled. It’s difficult to stay on top of your business if you don’t have accurate data to work with.
- Create and use a simple monthly budget report. Forecast your revenue and identify all costs for your business (fixed and variable). This can be accomplished by creating a simple spreadsheet or by running a report available in your accounting software. The purpose of this report is to track all future dates and sources of income and expenses for your practice.
- Run and review the financial data of your office, your “financial health record”, on a regular basis. Ideally, you want to know how much money you have today, how much will be coming in, and how much money will be flowing out of your business at any given time.
If you don’t use an EMR and prefer to do things by hand, you can create a simple Excel spreadsheet to keep track of your numbers.
However, if your practice uses an EMR, it might be best to utilize some type of bookkeeping or accounting program to help you track these numbers.
There are numerous platforms that offer an accounting portion integrated with their EMR. This might be a good option since much of your data will be coming from your EMR.
If you’re not sure how to set up a system to track financial data, you can turn to a professional to help you learn how to use your platform to track the performance of your business.
Thanks for staying with me…
I realize that “finance” is not the most exciting topic. Yet, I believe that paying attention to and knowing the financial picture of your practice is vital if you want your practice to grow and thrive.
We welcome you comments below.
By Johanna Hofmann, MBA, author of “Smart Business Planning for Clinicians” and regular contributor to the NPBusiness blog.