Learn How to Determine Your Practice Financial Health
BY Sybrid MD
Medical Billing | May 26, 2017
Determining the financial health of your practice on regular basis is the key to staying ahead of your financial liabilities. Checking the financial health of your practice can be a simple procedure of checking the periodic financial reports and there are advanced ratio and methods as well. However, as most of the physicians and practices are unfamiliar with financial terms so they depend mostly on the analysis provided to the by the billing companies or the person who manages their accounts receivables.
Staying informed about the financial health of a practice helps to take informed financial decisions. A simple financial analysis makes it easier for physicians to decide if they are planning to invest in something in the near future. Mostly, practices are not concerned with the financial health in the first couple of years of their start. During the early phase, practices are well funded and they are least concerned if the expense is more than the earning. However, in the subsequent years, when a business is mature enough, the ratio between the expense and the profits becomes very important.
Getting to know the financial health of your practice is very relevant in the current scenario when more focus is on investing in the new technologies and software systems and healthcare reforms are demanding escalating commitments from physicians. The expense required investing in an upgrade or purchasing new technologies can take away a major portion of your available funds. So, before deciding on any new purchase, practices should analyze the financial health.
To determine the financial health of a practice, start with compiling the financial data and cash flow reports.
Monthly Financial Reports
Analyzing the monthly financial reports is a must to make medical practice financial analysis. Practices can have a quick view of the cash flow by examining the monthly financial reports. There are multiple ways to analyze: physicians can compare the report with last month’s income and expenses. By checking income statements and balance, a practice can quickly take strategic decisions necessary for that month. However, to get a detailed overview of a medical practice’s financial health, review collections and accounts receivables.
Accounts Receivable (AR)
The payments that a practice receives are not quick to appear on financial reports. As most of the payments that come from insurance companies, organizations and other payers can take up to 90 days. In this situation, a true analysis of a practice’s financial health cannot be determined on the basis of monthly reports. However, someone with the capability of analyzing the aging of accounts receivables can quickly understand the quarterly fiscal performance. The AR reports also give a performance overview of your finance department. If the collectable amount is high and collections are pending for a long time then the practice is not in good financial condition. If the claims are not taking longer than an average time of 45 days then it reflects a positive cash flow.
Current Ratios and Acid-Test Ratio
Another way determining the current financial health of a practice is by calculating the current ratio. The current can be obtained by dividing current assets by current liabilities. Current assets are assets of a practice that can be converted to cash in a fiscal year. Current liabilities are all the due expenses of a practice for the same period. To check the financial health of a medical practice, we can get current ratio by dividing current assets by current liabilities. The high current ratio is indicative of good financial health and mostly a ration between 1to 3 is considered healthy. However, if the current ratio is less than 1 then the financial health of a medical practice is not stable.
The acid-test, also known as quick ratio, is another method. Quick I ratio is indicative of short-term liabilities and assets. Quick ratio is calculated by dividing current available cash, accounts receivables and short term investments by current liabilities. If the result of quick ratio calculation is less than 1 then a practice should reconsider their short term liabilities. It indicates that the practice is not ready to bear the burden of current liabilities.
Stay Updated About the Financial Health of Your Practice
To ensure that your practice is financially stable and is ready to manage long-term and short-term liabilities, you must regularly check the financial reports. Ask your finance department or the billing company which manages your accounts to submit weekly and monthly reports. By studying the financial assets and taking well-informed monetary decisions practices can ensure a stable future.