How healthy is your practice?

Physicians use various types of metrics to determine how healthy their patients are. We track and monitor diabetes with regular blood sugar checks and HbgA1Cs. Each time our patient comes into our clinic we record their weight, blood pressure and other vitals. In pediatrics, we use growth charts to track and monitor the child’s growth. In operating a financially healthy clinic, we should use similar metrics, and some of the easiest to use are financial ratios. There are many different types of ratios - productivity, liquidity, profitability, and financial strength. Each different type of ratio looks at a different aspect of your practice’s financial health. Here are a few of the ratios I use on a regular basis.

Working Capital

Working capital looks at your ability to pay your bills on time. If we subtract your current liabilities from your current assets, we find your working capital. The word current here means any asset that can be converted quickly into cash, typically within one year, or any liability or debt that is due, usually within one year. So what this ratio shows is if you get into a pinch, do you have enough liquidity in your assets to pay the bills that are due now? Using this ratio is an important ratio because it shows how close to the red line you're living.

Current Ratio

The current ratio is your current assets divided by your current liabilities. It is good to see this number over 2.0. Anytime you see it less than 1.0, you are in trouble or will be soon. If you happen to have cash flow issues, you’ll probably feel some pain.

Days in A/R

Days in A/R (Accounts Receivable) shows on average how many days it takes you to get the money you’re due. Some factors can influence this number. What are your billing and collections systems like? How effective are they? Do you know the most common reasons your claims are being denied? Are the issues on your side of the transaction or with the payer? What can you do to change those reasons? An average Days in A/R can range from 30 - 90 days. Let's assume your average is around 45 days. That means it takes you 45 days to collect the money after you have rendered services to the patient. It also means it is a good idea to have at least 45 days worth of cash on hand in case a payer or two decides to pay more slowly. You will want to watch this number very carefully. See what you can do to make it go down. If it starts to climb, alarms should be going off. That’s when you need to start asking questions and find the root of the problem.

Days in A/P

Like Days in A/R, Days in A/P (Accounts Payable), shows how long it takes you to pay your bills. You will want to watch this number because it will give you an idea of how quickly you’re using cash to pay bills. Now, I’m not advocating not paying your bills, but if their bill is net 60 (due in 60 days), why are you paying it in 7 days? Do you get a discount if you pay it faster or sooner than the terms of the contract? If not, have you asked for one? There’s nothing wrong with taking the full 60 days to pay the bill. The issue is more about cash flow management and ensuring you’ve got reserves if your A/R days grow. If you see your Days in A/P growing, it could be a sign of cash flow issues. You’ll want to carefully examine what is happening in your practice from a cost and operational perspective. Why are you taking longer to pay your bills? It could be a sign of serious things to come.

EBITDA

EBITDA shows a picture of the profitability of your practice. It strips away the financial or accounting decisions that can impact the profitability of the practice. In theory, it shows how much cash you make based upon what you do. The taxes, depreciation, amortization, and the financing decisions are more financial management decisions and not necessarily related to the day to day operation of the practice. It is a good metric of your profitability in what you do, but it is important to remember it doesn’t reflect cash flow at all.

Have a plan - things to do every month

At a minimum, you would benefit from examining your financial reports. Create a dashboard and track your progress each month. In pediatrics, we have growth charts. With diabetic patients, we monitor Hgb1AC. Why? We want to monitor the progress of their disease state. Let's approach our practices with the same discipline. Create a dashboard, pick the metrics you want to track and be disciplined in your approach.

Our employees and our patients deserve our attention to the reports. We help everyone, ourselves, patients, employees, and society as a whole when we manage our resources properly. However, we cannot do that if we don't have the knowledge. If you don't have the knowledge, get it today and never stop learning.

If you want more information about these reports, it can be found in my book, The Financially Intelligent Physician: What They Didn’t Teach You in Medical School, and in my online course at learn.davidnorrismdmba.com. In it, I discuss these and many more ratios in greater detail.

Wishing the greatest of success in your practice,

David