How to assess the financial health of your practice

To run a successful practice these days, you need more than a strong foundation of medical training and experience. Physicians in private practice are also required to manage a business — and having a basic understanding of the financial side can make or break your bottom line.

Especially in an industry that involves third-party payers, financial management is often a difficult undertaking. Costs aren’t always clear, payment cycles are complex, and when it comes right down to it, providing quality care doesn’t always allow for a cost-benefit analysis.

So how can you get a handle on the financial health of your practice? Conducting a simple assessment of a few key areas will give you a sense of where your practice is thriving and where it’s struggling.

Vital signs

Take a look at your practice’s “vital signs.” The following list may seem lengthy, but most of these figures can be obtained by pulling a report or two off your practice management software and studying your office’s bookkeeping reports.

  • Days/hours worked
  • Charges
  • Collections
  • Adjustments
  • Accounts receivable
  • Patient counts
  • Average visits per day
  • Relative value units (RVUs)
  • Expenses
  • Net income and physician compensation

But the numbers won’t mean much unless you track them over time. Setting up a simple spreadsheet is an easy way to monitor these amounts month to month. (You can download a sample financial vital signs worksheet from here.) You’ll be able to set benchmarks, see patterns, and quickly become aware of any significant variations. And when the numbers don’t fall in line, you can take a deeper look to identify what’s causing the fluctuation.

Formulas and ratios

A couple of simple calculations can help you better understand what your financial numbers really mean. For example, comparing accounts receivable and accounts payable across different 30-day periods will give you a sense of how much money is coming in and how much is going out over a given amount of time. If the ratio is significantly unbalanced, you could quickly end up with a cash flow issue.

Another ratio to keep in mind is your current amount of cash in the bank divided by your typical monthly expenses. This number equates to how many months your practice could survive if patients and payers stopped making payments. Yes, it may be an unlikely scenario. However, that figure can really put your practice’s financial health into perspective.

Nonfinancial measures

The numbers don’t always say it all. Financial reports provide a look at what has happened in the past, but nonfinancial measures can help you gauge the future. Consider staffing and employee engagement, upcoming marketing efforts, and patient satisfaction. Operational metrics like these can give you a broader sense of your practice’s financial state.

It’s all too easy to put your finances on autopilot and simply hope for the best. But without regular assessments and a strong awareness of your practice’s financial health, you could end up in the red. Carve out some time each month to review reporting and compare the numbers to your past figures. Keeping an eye on these simple measures will go a long way to ensuring your business’s success.

 

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