Financial Warning Signs

Determining our patients' health is something we can do quite quickly, in part, because we've learned how. The other part is that we put forth the effort to do so. Consider reviewing the financial statements of a company equivalent to performing an annual exam on a patient. You can get a distinct idea of how healthy the company by examining the reports. They are your EKG, CBC, CMP, and physical exam. Always look at the financial statements to understanding the company's current health, determine the prognosis, and develop a plan to fix the issues.

The first report I recommend looking at is the statement of cash flows. This report is incredibly powerful and will quickly show you what is happening to the cash of the company. Cash is the lifeblood of any company. Its flow will identify what's good and bad about the company. If you notice more cash is flowing out of the company than what is flowing into the company, the cash flow is negative, and that's bad. If the cash flow remains negative for a continued time, that's a dangerous signal that the company might run out of cash and be unable to pay its bills. Always check the cash position of the company by looking at the asset column on the balance sheet. If that number is dwindling over time, then you know there's a significant problem. Either fix the reasons causing the negative cash flow, or seek new cash sources from either lenders or equity holders.

Another tell-tale sign of problems is their accounts receivable (A/R). If this number is growing, that means people aren't paying the company the money they owe. If their days in A/R, the time it takes to collect cash for services or goods sold, is growing, that means they are having a hard time obtaining the money owed them. This number is found on the asset column of the balance sheet as a specific line item.

Another indicator is working capital. This is a calculation you will need to perform using numbers from the balance sheet's asset column. To do so, subtract their current liabilities (bills due in less than a year) from their current assets (cash, A/R, inventory). If that number is large and positive, they've got breathing room. If it's near zero, a problem exists and needs to be addressed. If it's negative, real issues exist.

On the income statement, you will find a line item called interest payments. Look at this number and examine how it's trending over time. You can see the impact of financing on the cash flow statement too. Too much debt, high-interest rates, and less than favorable terms can be detrimental to the cash flow. Remember, high debt will eat away at the profits.

Next, consider the debt-to-equity ratio. This ratio takes all the company's debt and compares it to the amount of equity in the company. A lower ratio means the company gets more of its financing or capital from investors rather than through debt. If it's high, then you know the company owes more to lenders than the shareholders have put into the company.

Aside from the financial statements, there are other signs you can see. Other symptoms of trouble can be seen, some of which do not appear in the financial reports. Look for managerial and operational signs of distress. This is especially true for privately held companies. If you don't have access to their reports (and you should be an owner or consider owning a piece of the company), you can examine the decisions and actions of the leadership team. Look at the directors and upper leadership. Have there been any recent and unexpected departures? If so, it can be a sign of bad things happening at the top.

Be aware of the market environment. Companies that are "doing fine" can quickly find themselves in trouble if the market changes and they aren't financially healthy. A downturn in the economy isn't the only force that can impact a company. A new strong competitor, a shift in the consumer's habits, and other factors can impact the company's financial health.

Be anxious if you see dramatic changes in their strategy. When a company moves away from its current core business, it might mean there is something amiss. Either they are very good strategic thinkers and moving before the market, or they are in poor financial health, and the current model no longer works. Both are risky.

Examine the quality of their products or services. Have they been trending down over time? What's the word on the street about their core business functions? If it's trending downward, that likely means they don't have the capital to support their services or products. The first place managers look to cut expenses is in customer support, research and development, and quality. Lower quality parts mean lower quality products and services. This begins a slow death spiral and a negative feedback loop.

These are just a few quick things you can do to determine your practice's financial health and longevity, an investment, or a potential employer. Invest the time and energy to determine the health of the company, and you'll save yourself head-, heart-, and wallet-aches.

To learn more about determining the financial health of your practice, visit www.davidnorrismdmba.com.

Check out my books!

The Financially Intelligent Physician & Great Care, Every Patient are available at Amazon and Barnes and Noble.

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