With accrual-basis accounting, revenue is recorded when you provide the service even if the practice is not yet paid for it, and expenses are recorded in the same manner.
“A profitable practice on a cash basis isn’t necessarily profitable on an accrual basis, and vice versa,” Dr. Hollander explained.
The amount of drug inventory you have on hand also can affect your profitability. “If you have a very large inventory in your fridge, that’s money not coming into the practice. When we started, we ordered inventory once every two weeks. Now, we order two days prior so we don’t have too much inventory on hand,” Dr. Hollander said.
Looking at Metrics
Once you’re clear on balance sheets and types of accounting, you can dig deeper with certain metrics. One metric that Dr. Hollander recommended tracking is operating expense ratio, or how much of every dollar is spent running the practice. This is calculated by looking at the operating expense net of drugs and excluding the owner’s draw, divided by collections. The goal is to get that ratio below 60%.
Another metric to consider is days cash on hand, an important consideration in case something terrible happens, like a pandemic or government shutdown. Knowing your days cash on hand can ensure funds are still on hand to pay staff. Calculating this involves looking at cash on hand divided by daily operating expense. “Traditionally, you would like to have two to three months on hand,” she said.
Current ratio is a metric to make sure that what you owe is not more than what you own. It’s taken by looking at current assets and accounts receivable and dividing that by the liabilities, accounts payable and upcoming payroll. Typically, you want this number to be above one.
Making Changes
As you analyze numbers, you will likely find areas that need improvement to help the practice run better financially. Dr. Hollander recommended using a process called DMAIC, which is part of the Six Sigma process. It involves:
- Defining a problem.
- Measuring the current process.
- Analyzing the problem to find a root cause.
- Improving the problem with solutions.
- Controlling to make sure that improvements are maintained.
This is no different from the process that you might use with patients, Dr. Hollander said. She gave the example of identifying (Defining) a patient who has high blood pressure. You find out the patient’s blood pressure is 160/100 (Measuring). You analyze the potential cause, such as a poor diet or a medication that contributes to higher blood pressure (Analyzing). You work with the patient to find a solution (Improving), such as changing their diet. You then check in occasionally (Controlling) to make sure their blood pressure remains lower.
