If You Can Measure It …

Every business can be reduced to a handful of numbers that can tell you at a high level how your business is performing. These key performance indicators become the guages on the dashboard of your business that can tell you when you need to pay special attention and potentially think aobut making changes. As the old saying goes, “if you can measure it, you can manage it.”  The first step in the process of business improvement is to identify the key performance indicators of your business and start measuring them regularly. Once you are measuring them, you can establish a baseline – a measure of where your business is today.

Once you have numbers, you’ll want to establish some benchmarks for where you think those numbers should be. In doing this, what’s more important than the absolute numbers are ratios because they allow for comparisons to other companies regardless of the size of those companies.

I would like to suggest three simple ratios you can and should start measuring that will help you to monitor . This list is by no means exclusive, but it provides a set of key indicators that if improved can help you to increase your revenues, profitability and free cash flow.

Measure 1 – Days A/R. This key peformance indicator asks the question “how many days on average does it take me to collect for the work I do”. This number is a ratio of your total receivables to your revenue. A good benchmark for Days A/R is 40 – 45 days – in other words it takes you 40 to 45 days on average to collect for the work you are doing today. Of course this will vary by your payer mix and other factors outside of your immediate control, but it provides a good target. It’s important to calculate this number monthly based on a stable A/R number that is matched to a stable revenue number. This usually requires a “hard close” which any modern practice management system should easily provide.

Measure 2 - Payment per visit hour by therapist and by payer. This ratio asks the question  ”for an hour worth of appointment time, how much am I collecting for this therapists work or from this payer?” It’s a little different than payment per visit because visits may have varying length. It’s also different from units per visit because you can’t pay your therapists with units.  You must be very careful when calculating this number: you can only calculate it based on visits that are fully paid against the actual payments received for those visits. Just taking this month’s payments divided by this month’s visits is like comparing apples with oranges. Getting a sense for your true payment per visit hour will tell you which insurance contracts (and which therapists) are most profitable on a per visit hour basis. The benchmarks for payment per visit hour vary by region, but if you think about what you’re paying your therapists by the hour and what you want your gross profit margin to be, it should give you a good benchmark for this number.

Measure 3 – Average Payment  per visit hour by Referral Source. This key performance indicator asks the question “which referral sources send me the most profitable patients?” Not all referrals are equal and not all referral sources are equal. In developing your marketing plan, it’s important to know not only the largest referral sources, but also to understand which referral sources if developed further could be the source of more profitable business. The best way to use this number is for ranking your marketing efforts – perhaps investing a little more in marketing to smaller referrers whose referrals are more profitable.

In a future article, we can look at where to look or “drill down” if any of these numbers is heading in the wrong direction.