Support our online development, and advance our onground research initiatives in free market economics, as we seek to showcase the brightest Next-Gen minds.
THE ME-P DISCLAIMER: Posts, comments and opinions do not necessarily represent iMBA, Inc., but become our property after submission. Copyright © 2006 to-date. iMBA, Inc allows colleges, universities, medical and financial professionals and related clinics, hospitals and non-profit healthcare organizations to distribute our proprietary essays, photos, videos, audios and other documents; etc. However, please review copyright and usage information for each individual asset before submission to us, and/or placement on your publication or web site. Attestation references, citations and/or back-links are required. All other assets are property of the individual copyright holder.
Understanding Vital Balance Sheet and Income Statement Components
By Dr. David Edward Marcinko; MBA, CMP™
By Dr. Gary L. Bode; MSA, CPA, CMP™ [Hon]
Financial ratios are derived from components of the balance sheet and income statement. These short and long-term financial ratio values are “benchmarked” to values obtained in medical practice management surveys that become industry standards. Often they become de facto economic indicators of entity viability, and should be monitored by all financial executives regularly.
Defining Terms
One of the most useful liquidity ratiosrelated to ARs is the current ratio. It is mathematically defined as: current assets/current liabilities. The current ratio is important since it measures short-term solvency, or the daily bill-paying ability of a medical practice, clinic or hospital; etc. Current assets include cash on hand (COH), and cash in checking accounts, money market accounts, money market deposit accounts, US Treasury bills, inventory, pre-paid expenses, and the percentage of ARs that can be reasonably expected to be collected. Current liabilitiesare notes payable within one year. This ratio should be at least 1, or preferably in the range of about 1.2 to 1.8 for medical practices.
Other Ratios
The quick ratiois similar to the current ratio. However, unlike the current ratio, the quick ratio does not include money tied up in inventory, since rapid conversion to cash might not be possible in an economic emergency. A reasonable quick ratio would be 1.0 – 1.3 for a hospital, since this ratio is a more stringent indicator of liquidity than the current ratio.
Assessment
A point of emphasis in the case of both the current ratio and the quick ratio is that higher is not necessarily better. Higher ratios denote a greater capacity to pay bills as they come due, but they also indicate that the entity has more cash tied up in assets that have a relatively low rate of earnings. Hence, there is an optimum range for both ratios: they should be neither too low nor too high.
Conclusion
And so, your thoughts and comments on this Medical Executive-Post are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.
Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos
Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com
OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:
DICTIONARIES: http://www.springerpub.com/Search/marcinko
PHYSICIANS: www.MedicalBusinessAdvisors.com
PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
BLOG: www.MedicalExecutivePost.com
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Share this:
Filed under: Accounting, Career Development, CMP Program, Healthcare Finance, Practice Management | Tagged: accounting equation, accounts receivable, ARs, bad debt expenses, balance shet, COH, current assets, current liabilities, david marcinko, financial ratios, Gary Bode, income statement, medical billing, medical invoicing, quick ratio, ratio analysis, www.certifiedmedicalplanner.com, www.healthcarefinancials.com, www.healthdictionaryseries.com, www.medicalbussinessadvisors.com |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Gary,
Recently, some practices were selling out to Public Practice Management Companies (PPMC) or other buyers.
However, many of those transactions have soured since the PPMCs or other network models were not able to generate the earnings Wall Street or some other market force wanted to see.
Many of those same practices are now being bought back by the same physicians that sold out several years earlier. If an entity is being bought back and accounts receivable is being purchased, be careful not to pick this item up as income twice. The costs can be immense to the practice or other business unit.
The CPA
LikeLike
Quantitative Business Ratios
There are many quantitative business ratios. While controlling expenses, focusing on revenue and making smart decisions on what assets to purchase or to get rid of are quantitative components of ROI; practice owners should not forget to also fucus on the qualitative components of ROI.
An effective, efficient, and profitable business must clearly articulate its mission, invest in quality and appropriate technology, train and properly rewards people, insure organization structure supports mission accomplishment, and ensure leaders know where they are leading those being led.
Leroy Howard MA CMP™ candidate
http://www.CertifiedMedicalPlanner.org
http://www.amazon.com/Dictionary-Health-Economics-Finance-Marcinko/dp/0826102549/ref=sr_1_6?ie=UTF8&s=books&qid=1254413315&sr=1-6
LikeLike
QUICK RATIO
I’m glad you included the quick ratio. I definitely feel it is the more accurate indicator of ability for a practice to cover short term liabilities. Also, payables that are 6-12 months out (assuming it’s coming from patients) will likely go to collections or be sold to a collection agency.
JOE
LikeLike
Aged Accounts Receivable (A/R)
The A/R report summarizes your practice’s lifeblood: the potential revenue from payers and patients for services you’ve rendered. That’s right: potential – because any number of things can hinder (or halt) payment to your bank account. And that’s precisely why physicians must review their A/R on a monthly basis.
Start with “Days in A/R,” which indicates the average number of days it takes to collect on an account. [Total A/R ÷ (annual gross charges ÷ 365)]. “Days” of 30 or less is good. “Days” of 50 or more is not so good. And look at the percentage of total A/R in each aging category. More than 10 percent to15 percent in the 120+ days indicates a problem.
If the indicators signal trouble, analyze further. For instance, review A/R by individual payer to determine if specific companies are slow to pay, and identify why by analyzing explanation of benefits (EOB) for denial patterns such as noncovered service, applied to deductible, patient ineligible, or wrong modifier. If necessary, modify your operations or train staff accordingly to minimize denials.
JOE
LikeLike