Financial Accounting and Medical Practice Benchmarking
[Improving What’s Measured]
By Gary L. Bode
Profits are an opinion; cash is a fact – Unknown
Introduction
This chapter begins with the external point of view of your medical practice, as in the case of a banker considering your business loan. Financial statements are discussed, emphasizing their translation from financialease into English.
Some useful financial benchmarking ratios are then explained, both at a specific point in time, and, as successive values over time for internal managerial purposes. The chapter makes a strong case for proactive practice management and illustrates some of the tools needed to do so.
Your Medical Practice as an Asset
Your practice is a valuable asset in two respects. First, it provides the work environment that generates your personal income. Second, it has inherent sale value that can be part of an exit (retirement) or transfer strategy.
Some of this inherent value lies in the current market value of medical equipment, minus any money owed. The other aspect of inherent value is goodwill, or the worth of the practice as on going concern that allows you to sell it to another practitioner.
Despite the importance of the practice to the practitioner, some practices essentially run without a manager. This is like an orchestra without a conductor, in that the individual facets of talent have no common pathway to make music. Other practices evolve over time reactively, and are not what the practitioner would have proactively defined as ideal.
Sample Case Model: Financial Benchmarking Case Model
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Internal Practice “Spot Audits”
Some typical examples:
• sample tracing of patient visits, through billing, accounts receivable, collections, final bank deposits, and charting.
• pulling, examining and matching underlying transactional accounts payable documentation.
FYI – this is a great position for a non physician spouse. It is vital, but shouldn’t cause any friction with the regular staff.
Dr. Gary L. Bode; CPA, MSA, CMP™
Medical Practice Financial Benchmarks
The current ratio is used by creditors as an indicator of liquidity and helps predict a medical practice’s ability to pay current debt. It is very important.
But, as part of a diligent practice management policy, the practice itself should set an internal benchmark for the current ratio and monitor it. Inherent practice liquidity might affect the decision, say, on the required delay before disability insurance payments cut in.
Longer delays mean cheaper premiums.
Trend analysis is one of the tools that produce an accurate current picture of the practice’s financial and operational dynamics. It also provides a wealth of managerially useful information to survive and thrive in these changing and very competitive times.
Common other applications include new third party payer contract evaluation, bank financing, staff incentive programs and multiple areas of practice management; etc.
Dr. Gary L. Bode; CPA, MSA, CMP™
Financial Benchmarking
CASE MODEL: EVALUATING CD PRACTICE
Scenario:
Main Hospital is considering purchasing a four-cardiologist/physician professional medical practice (the CD Practice) and is evaluating its finances as part of the due diligence process.
Some of the key areas to evaluate are staffing levels, accounts receivable, and productivity per RVU.
Main Hospital analysts undertake financial status benchmarking, expressed as “ratio analysis,” as a method of comparing CD Practice to industry standards/norms in order to determine the relative risk of the investment, as well as determining the discount rate/cost of equity. They set out their findings in table format showing a comparison of certain aspects of CD Practice’s historical performance and financial position, as measured by financial ratios, and compared against ratios developed from two sources of industry survey data.
View case model here: https://businessofmedicalpractice.files.wordpress.com/2009/11/financial-benchmarking-case-model.pdf
Source: Health Capital Consultants, LLC