Knowing the Math

December 18, 2008
Owen Dahl

Successful practices know their numbers.

Successful practices know their numbers. But consider that a number is simply an abstract object used in counting or measuring. How you manipulate and analyze your numbers can reveal deeper truths in your financial health. Assigning units to numbers -- a $20 copay or 100 office visits -- gives you more useful information. Creating a relationship between two numbers can reveal even more knowledge. With these sorts of quantifiable measurements, you have something you can sink your financial teeth into.

For example, let’s assume the following:

  • You collected $40,000 last month.

  • Your accounts receivable is $175,000.

  • Your payroll was $15,000.

  • Your office had 500 visits and performed 50 EKGs.

Collections

-- Let’s say your collections over the past six months averaged $40,000. Comparing this number to total monthly charges averaged over the same period -- say, $100,000 -- reveals a gross collection percentage of 40 percent. If during the following six months you collected an average of $45,000, you might think you’re doing great. Unfortunately, your average monthly charges during that same timeframe were $130,000, meaning your GCP dropped to 34.6 percent. Which period is actually better?

Accounts receivable -- If your A/R is $175,000 and your average monthly charges are $80,000 what does this mean? I like to look at the number of days outstanding accounts sit in A/R. You can calculate that by dividing $80,000 into $175,000; we get 2.18 months in A/R -- the amount of time it takes for an outstanding bill to clear your A/R. I prefer to convert this to days since it shows progress better: 2.18 multiplied by 30 equals 65.4 days. This, by the way, is a high number; it should be in the 30-day to 40-day range.

Payroll -- Your monthly payroll expense is $15,000, but when you consider that in relationship to your total monthly income, you get a percentage that tells you much more. Although it varies by specialty, payroll should be 20 percent to 25 percent of your monthly receipts (a good guideline for primary care). So if you receive $40,000 in monthly revenue, your payroll is high at 37.5 percent.

Patient care -- You can also consider data that is not financial in nature and still gain a better understanding of how well your practice is doing financially. Comparing 500 patient visits to 50 EKGs performed means that you did one EKG for every 10 patient visits or 10 percent of your patients. You can also quantify your patient feedback. Let’s say you do a quarterly patient satisfaction survey and your “very good to excellent” response is 95 percent. Great! But what about the other 5 percent? Assuming you have 6,000 annual visits, that means 300 patients had an unsatisfactory or neutral outcome. Are you happy with that?

Trends -- Use time to help you analyze your numbers. Compare the $40,000 you collected last month to the previous month(s) or the same month last year. Consider building a simple Excel chart to visually see your practice’s progress (or lack thereof).

Numbers can be made to say a lot. It’s important to understand the details behind the calculations, and not just accept them as fact. The knowledge that you gain from this understanding will go a long way to growing a more successful practice -- one that can survive in this difficult economic time.

Owen Dahl, FACHE, CHBC, is a nationally recognized medical practice management consultant with over 24 years of experience in consulting for and managing medical practices and author of Think Business! Medical Practice Quality, Efficiency, Profits. He can be reached at odahl@comcast.net or 281 367 3364.