Practice Finances: Where There’s Smoke, There’s Fire

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The adage, “where there’s smoke, there’s fire” holds particularly true when it comes to practice finances. Problem signs — from lagging collections to soaring overhead — may start off at a simmer, but can quickly reach full boil. The trick is to look for the smoke so you can put out the fire before it rages out of control.

Consider these warning signs of potential problems:

Your receivables drop — A drop in accounts receivable can be a smoke signal that production is lagging. The trick is to determine if the production hit is temporary (a dip in charges from a physician who has been away on vacation) or if it is something much more serious, such as a loss of referrals.

Put out the fire: Set up your monthly AR summary to show the trends month-to-month as well as year-to-year.

Your collections dwindle — You may be able to see this one coming if you spot an increase in receivables over 90 days old. Here, the culprit could be anything from delayed claim submissions to denials and poor follow-up.

Put out the fire: The best defense is a detailed accounts receivable report that includes not only overall aging, but also aging of patient receivables and insurance receivables.

Your overhead soars — Salaries increase and the cost of supplies inevitably rises. But what is not inevitable are sharp and unexplained increases in practice overhead. Soaring costs demand investigation. Yet, it’s important to remember that revenue also factors in to the overhead equation. Declining revenues are sometimes the culprit behind inflated overhead.

Put out the fire: Benchmark average overhead for your geographic area as well as your area of practice. Break practice expenses into categories (salaries, supplies, rent, etc.) and compare costs from month-to-month and year-to-year.

Your adjustments jump — Over time, a pattern should emerge and your practice’s typical adjustment rate should become obvious. Be wary of any major variation, which can be a sign of anything from changes in billing patterns or payer mix to embezzlement or a recurring data entry error.

Put out the fire: Depending on your billing cycles and productivity, adjustments can follow charges by two to eight weeks. To accommodate for this, compare the current month’s adjustments to charges and collections from the prior month or even the month before.

You start seeing late charges and penalties — A medical practice that can’t pay its bills within 30 days may be suffering from serious cash flow issues. Getting dinged with late charges and penalties is compelling proof.

Put out the fire: Review practice bank statements for any unusual or unexpected withdrawals to rule out fraud. Then, conduct a cash flow analysis to determine where the bottleneck is occurring.

Avoid a Five-Alarm Fire

Your practice finances will let you know when trouble is brewing — if you know what to look for. Your best bet for spotting the smoke is with a regular process of monitoring and review. Start by establishing a basic dashboard* of relevant metrics and key indicators — and keep an eye out for any variances.

Then, put a practice administrator, physician manager or outside accountant on the job of monitoring the practice’s financial indicators on a monthly basis. Finally, schedule a regular meeting to review and discuss the information with all stakeholders in the practice.

Need help monitoring your practice’s financial indicators? Our experienced accounting professionals can help.

Electronic Dashboard (Doctor)* An electronic dashboard could prove very useful to your practice. To learn about dashboards and see an example, click here.

SKR+CO Expert
Judy Kaltenbacher, CPA, Tax Partner
Judy has been in public accounting since 1985, with significant experience serving medical practices, real estate partnerships, S-Corporations, financial institutions, nonprofit organizations and small business clients.