Charting your practice health: Putting an income statement to work

When one of his two partners left the group, Gene Murff, MD, an ob-gyn in Waco, Texas, knew it would impact practice finances. But Dr. Murff and his remaining partner weren't sure how much of an impact to expect.

Fortunately, they had a way to find out. They use an income statement to monitor revenue and expenses for their practice and use industry statistics to compare it with similar practices.

"With his leaving it was important to keep an eye on our expenses to make sure they were consistent with what the earnings of two physicians would produce, so it was very helpful," said Dr. Murff.

Many physicians are discovering just how useful income statements can be. By spelling out revenue and expenses, the statements can be used to detect patterns and reveal how practice finances are changing. And whether these accounting tools are prepared with professional help or within the practice, they can be customized to ensure that physicians get exactly the measurements they need.

With the help of his practice adviser, Dr. Murff has been using income statements for about 10 years. They have helped him with such things as staying competitive with staff salaries to revealing that the practice was spending too much on a type of injection given to pregnant women.

He believes the effort has paid off in spades. "The cost in doing this comes back in dividends in what you learn and savings that you develop."

Income statements -- one of three major financial statements commonly used by accountants -- come in all shapes and sizes. Generally they include two major categories: revenue and expenses, which are then broken down into smaller categories and used to calculate profitability.

Before getting started, experts say it is important to determine if accounting will be done on a cash or accrual basis. Cash-basis accounting notes revenue and expenses as they are collected or paid, while the accrual method records revenues and expenses when they are consummated. Most corporations use the accrual method. But most physicians find cash-based accounting gives a better picture of cash flow.

Once the accounting basis is decided, the major line items can be determined. Revenue can be broken down into as subcategories, including such things as third-party payments, co-pay and deductible payments from patients, income from ancillary services, interest earned on excess cash, or proceeds from sales of durable medical equipment.

Regardless if your revenue reflects collections or charges, accountants stress it is important to record these figures as accurately as possible. This could reveal problems in billing and collections, allowing time to respond before there is major damage.

The second key category of an income statement is expenses. Again, this can be broken down into subcategories, including payroll and benefits, drugs and clinical supplies, office supplies, rent and utilities, equipment leases, advertising and insurance.

Some experts like to break out the expenses related to physician salaries and benefits so practice leaders can see how that relates to profitability.

"As you monitor this as total overhead, you should also monitor important pieces, like clinical supplies, clerical supplies and staff salaries. Those tend to be your varying costs of doing business," said David E. Hunt, a consultant and principal with the Waco, Texas-based tax and advisory firm Parrish, Moody & Fikes.

Martha Bethea, a director with the accounting, tax and advisory firm CBIZ in Akron, Ohio, said such data could "help you to see things that aren't being properly controlled," like too much staff overtime or ordering problems with supplies.

Such was the case at OMNI Orthopedics in Canton, Ohio. A few years ago, the 13-physician multispecialty practice saw on an income statement that there had been an increase in its supply costs. A closer look at invoices pinpointed film costs, said Raymond Zinicola, OMNI's administrator.

The practice discovered the vendor's computer system had been upgraded and no longer had the correct pricing information for the practice. The problem was corrected and OMNI got a credit.

Zinicola said the income statement helped the practice track down the mistake quickly -- a key to helping the practice run smoothly. "I want to catch any fluctuation in cost now."

Do it yourself or get help

The statements don't require much additional work, he said. The practice's accountant creates the statements based on a preliminary report Zinicola provides after looking at invoices and collections.

Some practices may choose to do it all in house. Bethea said it could take a few hours a week for a small practice to record the necessary information or it could be a full-time job in a larger group.

Nick Fabrizio, PhD, a Syracuse, N.Y.-based senior consultant with MGMA Consulting Group, said most practice administrators could put together a basic income statement.

Those who choose to outsource the work should make sure that the statements are kept basic enough that they will be understood by non-accountants, he said. "We need a snapshot of this that makes sense to the physicians." He added that some bill-paying software programs include a function that will automatically create an income statement.

Income statements are often updated monthly, though some practices may choose to do so less frequently. "You don't want to go any less often than quarterly just because of planning," said Bethea. "If something odd is going on in the practice you wouldn't have time to get your arms around it."

To help the practice see how it is faring compared with past performance, many income statements include data on the current recording period compared with the same period a year earlier, and the current year compared with the year before.

"If you're in a cycle of growth it's going to be a little hard to [gauge performance]," said Dr. Fabrizio. "But once you establish some normal operating procedures, it's helpful to look at year to year."

Recording the same categories and periods with each statement will help make the information more meaningful and make it easier to see emerging patterns, said Hunt.

Trina Burling, office manager of the solo family practice of her husband, Chris Burling, MD, in Mount Pleasant, Texas, said using an income statement helps her gauge her own performance.

"Am I collecting well based on the volume of patients? It gives me an idea where I stand with the volume of patients and what's coming in the door as far as the payments are concerned," she said. "It helps me know if I'm doing my job well or not."

Burling mostly just uses the information to compare the practice against itself. But others compare their information against industry data.

Daniel Mefford, a consultant and president of The Practice Resource Management Group in Columbus, Ohio, said consistently using major expense and revenue categories, rather than specific line items, will help increase the impact of comparisons. "Once you break away from the major expense categories, your benchmarking ability becomes rather small because very few other people will break down into those small categories."

Dr. Fabrizio said he likes to keep the categories basic. "I really like to have them boil it down to revenue minus expenses equals net income. And net income is what I think is one of the most important measures of a practice's profitability."

Benchmarking data are available through various industry groups. The Medical Group Management Assn. issues several annual surveys, Dr. Fabrizio said. Mefford said consultants may also have access to industry data through professional associations. Adding this tool to others used to track practice performance could provide the safety net needed to avoid a perilous situation.

"In carefully monitoring your income statement, the hope is you can avoid getting into a crisis situation, see problems quickly and then resolve them," Bethea said.