Keeping track of the financial health of your practice is important for many reasons. On the most basic of levels, it allows you to keep the doors open. You can retain your staff, keep their morale high and remove the headaches associated with worrying about money month to month. Most importantly, though, it allows you to focus on patient care.
There are few financial ratios providers can perform using income statements and balance sheets provided to them by their accountants and office managers. These ratios will help you determine the level of financial stability of your practice and help you make better decisions for your future.
Financial health is hard work. Just like we ask our patients to keep track of their diet and exercise activity, we should also closely monitor the financial health of our practices. We must be diligent in actively managing our business.
Important Points for Keeping Track of Financial Health of Your Practice
Days in AR
Days in AR measure your practice’s ability to convert receivables into cash. The calculation is performed by dividing accounts receivable by the revenue and then multiplying by 365. Less number of days in AR indicates that the practice can quickly collect on its debts.
This ratio varies from industry to industry. The important thing to watch is whether the number increases. If it is increasing, it should spur your staff to investigate why and find ways to bring the number back down. Every practice should know its general days in AR.
It is equally important to know the days in AR for each payer class. How long does it take for Medicare, Medicaid to pay you? How long does it take for private insurance carriers to pay you? How quickly do you collect patient responsibility? These are all important questions that can help you make better decisions and plan for the future.
Days in AP
Like days in AR, days in accounts payable (AP) measures how long it takes for the practice to pay its bills. This is an important ratio because it can be a lagging indicator of the financial health and solvency of the practice. Also, it can be a good indicator of how well the practice is using its cash.
Paying bills too soon might strap the firm for cash in the short term. Paying bills too late put the practice in jeopardy of financial and legal action. This is also a good ratio to know about those with whom you have service contracts or agreements.
If they take a long time to pay their bills, it will give you an indication of what to expect. This calculation is made by the ending accounts payable divided by the cost of sales divided by the number of days.
Solvency Ratio
The solvency ratio is an indication of the firm’s ability to pay back its short-term liabilities. This is a critical ratio for any company, particularly in medical practice. To obtain this ratio, we take all of the current assets and divide them by the current liabilities.
If the current ratio is less than 1, this indicates the company has more debt due within one year than it has assets it can use to pay those debts. If your current ratio is less than 1, you need to seriously consider how your practice will survive should something happen to your cash flow.
calculation of solvency ratio is easy but you must be aware of a few definitions. When we say ‘current’ in a financial report, we are indicating that we can either convert the asset into cash within a one-year period or the liability is due within one year.
Current assets are assets we can convert to cash within one year. Current assets are cash, cash equivalents, accounts receivable (A/R), bad debt allowance, and any inventory we have on hand. Current liabilities are bills that must be paid within one year.
Current liabilities are all notes and accounts payable due within one year, interest payable, wages payable and income taxes payable.
Profit Margin
Profit margin is a measure of what proportion of the company’s revenue is left over after paying the variable costs of production of the services or goods. It is calculated by dividing the operating income by the net revenue.
These costs include wages, raw materials, etc. It is important to have a healthy operating margin so that the company has enough cash to pay its fixed costs. This is also known as an operating margin or the net profit margin.
As a practice owner, it’s really difficult to keep track of the financial health of your practice as you are busy with inpatient care. It’s really difficult to take time out and go through all the accounts and try to maintain the practice’s financial health.
We can assist you not only in maintaining the financial health of your practice but also increase revenue for your practice. Medical Billers and Coders (MBC) is a leading medical billing company providing complete revenue cycle services.
Our complete medical billing solutions include various practice reports which help you to understand the exact financial health of your practice on a weekly/monthly basis.
By reviewing these reports, you can easily understand the total amount of claims submitted, paid amount, unpaid amount, the amount in account receivables, payer-wise paid amount, payer-wise denied amount, patient responsibility, and many more.
To know more in detail about our medical billing and coding services, contact us at info@medicalbillersandcoders.com / 888-357-3226
FAQs:
Tracking your financial health helps keep your practice running smoothly, retain staff, and reduce financial stress. It also allows you to focus on providing quality patient care.
Days in AR measures how quickly your practice collects payments. A lower number indicates faster collections, which improves cash flow and financial stability.
Days in AP shows how long it takes your practice to pay its bills. Managing this ensures your practice has enough cash to cover short-term expenses without jeopardizing financial health.
The solvency ratio measures your practice’s ability to pay short-term liabilities. A ratio below 1 means you owe more than you can pay with current assets, signaling potential cash flow problems.
Profit margin shows how much of your revenue is left after paying variable costs. A healthy margin ensures your practice can cover fixed costs and remain profitable.
Catering to more than 40 specialties, Medical Billers and Coders (MBC) is proficient in handling services that range from revenue cycle management to ICD-10 testing solutions. The main goal of our organization is to assist physicians looking for billers and coders, at the same time help billing specialists looking for jobs, reach the right place.
