Steve Rebagliati, MD, confesses to one of his most costly mistakes - and explains how technology-aided practice management can help you avoid the same error.
You may already have a financial adviser you know and trust, but you’re still personally accountable for understanding what’s happening with your own money. And this is where the right financial management software can help.
There are three elements to using financial management software, and the key to all of them is their reporting structure. Such software includes:
When I ran a single-specialty group with 10 physicians, I used a third-party billing service to provide the practice revenue measurements mentioned above. You may want to do the same. Otherwise, be sure that the practice management module you use shows you how long your accounts are aging by patients, payer mix categories, and specific payers.
This functionality is important to help you pick out “red flags” in your cash flow. For example, some six months into restarting my medical group (which had become insolvent under the prior owner), I noticed that one particular payer was shorting my revenues by improperly paying a substantially discounted rate.
The billing reports made it clear what was happening and I was able to take the company to task. The reporting structure for your billing has to be robust and accessible to you. This is often not the case with billing companies.
Financial management software should let you take easy-to-understand snapshots of your financial position at any given time. Your three most important financial statements are your income statement (sometimes called P&L), your balance sheet, and your cash flow statement.
You will need to learn a little about each of these, and there is a tradeoff among software packages that offer different levels of reporting “cleanliness” depending upon your accounting knowledge.
You cannot simply abdicate all of this work to an accountant. If you do, you may make the embarrassing mistake I did. Knowing that something called a cash flow statement existed, I asked my accountant to project my medical practice’s cash flow needs for the next 18 months. Of course, not knowing how to read cash flow statements, I didn’t know the assumptions that went into this kind forecasting. This led to an unexpected $40,000 shortfall one month that I had to make good on out of my own pocket.
So my recommendation to you is to look at either Quickbooks or Peachtree and use them to generate some financial reports for yourself.
If you want a quick and easy way to choose I would say this: If you’re willing to read a hundred pages or so out of a good financial primer for doctors (and I can recommend several), then go with Peachtree; the double-entry bookkeeping is explicit, and the financial reports are very clean and easy to understand in standard accounting terms.
But if you’re unwilling to learn even the basics, then something like Quickbooks, which integrates your bookkeeping in the program’s background and looks and feels more like a checkbook register, will do the job for you. However, although Quickbooks’ financial statements are formatted in a way that makes them easier for non-accountants to interpret, they can also lead to some odd and possibly misleading reports depending on how you set the software’s defaults.
I recommend the first alternative, coupled with a monthly meeting with your accountant. Better yet, have your accountant prepare the same reports you produce with your software package, and then compare them. That practice may result in an eye-opener that will save you from a $40,000 mistake. You can have your office manager generate the reports for you, but make sure you know what the numbers mean.
What can a spreadsheet program like Microsoft Excel do for you? Excel lets you set up different models of your business. Working with your accountant and office manager, you can develop templates for the metrics that are important for judging your practice’s financial health.
For example, have your office manager create a “sources and uses” spreadsheet. Such a spreadsheet has three parts:
The top third consists of all the sources of revenue important to you listed in rows down the left side. It’s important to customize this for what’s important to your particular situation. You can list every single patient account, payers individually, payer classes, networks - whatever degree of specificity you want, depending upon how much you want to fine-tune your revenue estimations.
The middle third consists of all the uses of your revenue. What did you spend your money on? Typically this would mirror your regular expense accounts, but it can include other categories such as anticipated equipment purchases and capital investments.
Then enter data in columns by the time periods of importance to you, usually monthly.
In the bottom third, have your office manager (or yourself) list four or five financial measurements that can best describe the health of your practice. For example, you can create a row for percentages of revenue spent on certain overhead expenses you think you might want to trim back. Or you might want to estimate the same percentages for expenses that you anticipate increasing as you grow your practice. This is a quick and easy way to get an “early warning radar” regarding where your practice is heading. You might discover early on that your expense ratios are growing faster than your revenues. Or you might discover economies of scale with improving efficiencies that signal you to grow even faster.
Using tools like this enables you to automate financial data and report it in a form you can use to make important strategic decisions, such as when to bring in new physicians, or when to add new benefits or training for employees.
Financial management software is to practice management what the discovery of fire was to the caveman. Learn to use it wisely, and you’ll eat steak as often as you want. Use it foolishly, or ignore tending it, and you’ll get burned.
Steve Rebagliati, MD, MBA, is a practicing physician. He offers these resources, ideas, and tips for using information technology to increase revenues, decrease hassles, and free up time, so physicians like you can succeed in a changing world. He can be reached at email@example.com or via firstname.lastname@example.org.
This article originally appeared in the May 2006 issue of Physicians Practice.