Smart ways to respond to-and reverse-declining profitability

December 12, 2018

If your profit is suddenly on a lower trajectory, resist the instinct to attempt a quick fix. Here’s what to do instead. 

Few things are more unnerving than realizing your business is less profitable than it once was-or than you counted on. 

The instinct to take immediate action is understandable. If you’re a physician, responding quickly to urgent situations is second nature. And after all, if your profit is suddenly on a lower trajectory, you may have reason to be concerned that you’re heading toward a personal financial emergency. 

Though it’s natural to act fast, resist the instinct to attempt a quick fix. Here’s what to do instead.

Invest enough time to be sure you’ve accurately identified the problem.

First instincts about the causes of profitability problems are often incorrect. That’s why getting a handle on the root causes of your situation is crucial-before taking corrective action.

Start with a meticulous review of your financial statements and accounting data for the past few years. Compare each revenue source and expense line in detail, making sure you have all the information you need to compare apples-to-apples. For example, if your accountants have changed up your chart of accounts, ask them to help you dig into the expense and revenue ledgers to find any specific items that have increased or decreased significantly over time. 

Carefully consider the impact of extraordinary items, lags, and run rates.

Be sure to review both year-over-year and month-by-month financial data. Any one-time expenses or revenues (e.g., an unforeseen legal expense, preventable inventory spoilage, or unexpected income like Meaningful Use payments) should be separated out to determine underlying, standardized financial performance. This will help you avoid confusion about whether specific items constitute harmful trends or are simply timing differences or extraordinary items unlikely to recur.

Let’s say, for example, that you’ve hired a new physician during the year. At the end of the year, you may find that her revenue falls short of expectations. But it might be incorrect to conclude that her production is not on target. Several types of lags could affect her total for that first year. Her productivity for the final two or three months of the year will tell you more about the pace she’s working at (her “run rate”) than the full-year figures. The effect of credentialing, billing, and payment lags on physician revenue should also be considered. Take a look at both billed amounts and collections to get a clearer picture.

Rejigger your accounting methods if necessary.

Practices that have acquired offices or launched new businesses sometimes fold those entities into the existing accounting. This simplifies accounting and bookkeeping, but makes it more difficult to identify the root cause of profitability problems that arise. 

If you’re unsure whether individual business activities are contributing to profit (or by how much), the (admittedly tedious) exercise of separating out the financials can greatly improve your analysis. And if you’re considering acquiring a practice or adding a new office or business line in 2019, plan up front for tracking expenses and revenues in a way that allows you to efficiently report on their profitability, not just the performance of your business in aggregate. 

More generally, regardless of practice structure, managers and accountants often differ in their preferences for tracking expense lines. If your financial reports show just a few general expense and revenue lines-each with many items rolling up into the totals-consider a transition to more granular accounting. While this will mean more upfront bookkeeping effort, being able to evaluate your numbers efficiently and effectively is invaluable-and can help you prevent profit problems before they start.

Know that revenue is often the problem.

Practices with unexplained or precipitous profit problems might first react by slashing expenses. Expenses are often not the root of the problem, though-and focusing on cuts may have limited impact. Cutting expenses can also make profit problems worse. For example, staff reductions may directly affect clinician productivity, and less marketing spend may translate to fewer new patients. Furthermore, expense cuts often lead to fear and erode morale, which can lead to turnover that can weaken financial performance even more.

Physicians and practice managers often turn to expense cuts first because they underestimate the degree to which revenue can be improved. Reimbursements may indeed be squeezed, but there are many drivers of your revenue you can influence significantly-and sometimes easily. Even small improvements in revenue drivers like timely billing and collections, accounts receivable management, scheduling, and no-shows will pay off again and again.

Revenue may also decline because of things going on outside your doors, such as a dip in the local economy, layoffs at a major employer, or new competition. Physicians and managers who are focused on day-to-day challenges may miss these bigger picture influences on practice performance. The impact of these externalities can be profound-but, on the plus side, they may present new revenue opportunities. 

For example, when large competitors enter a local market, independent practices may be able to compete effectively by offering more convenient or personalized services. When new employers or new health plans come on the scene, your practice can stand out by working flexibly with these organizations and targeting them for customized marketing efforts.

Be thoughtful when trimming expenses.

If it turns out expense cuts are needed, focus on ways you can cut that don’t undercut your productivity or penalize employees unnecessarily. For example, if a new internet service offers the same speed for less money, that’s a savings that goes right to the bottom line. 

Be clear on what will be gained when making cuts to make sure they’re really worth it. For example, if you consider cutting support staff, it can be helpful to think about how much productivity will be lost- often, the cost of keeping a medical assistant on staff is a lot less than the revenue that will be lost by eliminating the job (and that is without even considering the impact on morale that follows any job cuts).