DON'T BOX ME IN 

Companies Must Break From the Norm to Be Successful
By Dexter W. Braff

With continued cuts in reimbursement and increased competition from large, integrated health care systems, independents have little room for financial missteps. As the new year approaches, the time has come to sharpen your financial monitoring tools. Here are 10 simple strategies that home care companies can implement to improve financial management:

1) Shift from cash- to accrual-based accounting. Due to its simplicity, many firms continue to prepare financial statements on a cash basis, recognizing revenues and expenses when cash is collected and paid, respectively. As a result, changes in patterns of cash collections and bill payments can distort financial statements and their interpretation. Accrual-based financial statements, which recognize revenues when billed and expenses when incurred, factor out volatility in cash collections and disbursements. Because of this, accrual statements provide a more reliable measure of performance and profitability.

2) Increase frequency of financial reporting. Many firms continue to prepare financial statements on quarterly or six-month intervals. Such delays in reporting prevent managers from swiftly identifying potential problems and devising appropriate initiatives. Statements must be prepared on a monthly basis to improve the feedback-response loop.

3) Vigorously monitor cash collections. A seemingly profitable activity can turn into one that generates loss when shrinking margins and unpaid bills are factored in. To monitor performance in this area, companies should track days sales outstanding, billings on hold, and cash collections as a percent of revenues. These measures will not only alert managers to potential problems as they arise, but will help determine an appropriate reserve for uncollectibility, which is necessary to prevent overstating the firm's income.

4) Write off old receivables. Allowing old receivables to accumulate on the firm's books distorts measures of days sales outstanding, uncollectibles and, profitability. Additionally, the sheer volume of receivables can overwhelm collections personnel. After reasonable efforts have been made to collect receivables, write them off, so you can get a more accurate measure of uncollectibility and keep collections personnel better focused.

5) Take frequent inventories. With many firms turning to retail sales as a competitive niche even though the sales generating thinner margins than traditional rental activities, it is increasingly important to accurately monitor the cost of goods sold. Even with sophisticated perpetual inventory systems, it is necessary to take periodic inventories to correct input errors, record shrinkage or other adjustments.

6) Reduce or consolidate income statement expense accounts. To better track and categorize expenses, firms often add new entries to their chart of accounts. Over time, the number of accounts can become unwieldy, and the differences between them less distinct. This leads to inconsistently and inaccurately coded expenses which compromise analysis. Before the new fiscal year begins, companies should examine their chart of accounts and reduce or consolidate where appropriate. The resulting improvement in analysis will likely more than offset any loss in detail.

7) Prepare a budget. Especially in 1998, when reductions in Medicare oxygen pricing will substantially cut revenues and necessitate changes in operating strategies, preparing a budget is an essential planning tool. Budget preparation provides the basis for assessing performance throughout the year and forces management to re-examine its basic operating assumptions and conditions at the company.

8) Monitor revenues by product, referral, and payer. One of the best ways to evaluate the performance of a home care company is to analyze revenues by product, referral and payer, and examine them as a trend over time. Among others, these measures can provide valuable insight regarding the success of product development initiatives, diversity of referrals and payer sources, and shifts in product and payer mix that can impact profitability. These reports are often available in the management reporting modules of software packages.

10) Compare performance to industry standards. To better interpret financial statements, it is valuable to compare performance to industry standards, such as those published by National Association for Medical Equipment Services and Health Industry Distributors Association. Such comparison can provide clues to where improvements can made in financial and operational performance.

11) Take a course in financial management for non-financial managers. When pre-tax profits were 25 percent to 40 percent, perhaps owners could rely on their in-house or, more frequently, outside accountants to explain the company's financial results. With a lower margin for error and greater demands on management to develop new products and services and operational efficiencies, owners must be able to interpret financial results first hand. These types of programs are offered by local colleges, chambers of commerce and adult education facilities.

Implementing any or all of these strategies can go a long way to gaining greater financial control of your company during the upcoming year--a year that looks to be extremely challenging for home care.

Reprinted from HOMECARE Magazine, December 1997