Drowning in Red Ink?<

by: Robert Redling

Is your debt getting out of hand? We can help.

Neither a lender nor a borrower be? Sound advice in the Elizabethan era perhaps, but in a modern business climate, no way. Debt is often the fuel for growth. What matters, experts say, isn't whether your practice has some debt — nor even how much it has — it's whether you've accepted your fiscal obligations strategically.

And of course, whether you can pay it back.

"Debt is a good and sound business concept because it is the key to growth," says Marshall Maglothin, MBA, president of Blue Oak Consulting in Holden, Maine. "Physician practices have to grow because they have competition just like any other business."

But what if your practice's debts are piling up faster than you can pay them back? Rather than swearing off debt or looking for ways to bail out, experts recommend you focus on carefully monitoring your practice's performance; find ways to generate more revenue; reexamine your borrowing sources; and try to renegotiate with lenders.

Physician practices get in financial trouble for a myriad of reasons, but experts say that physicians themselves can be the biggest culprits by not adjusting their pay when cash begins to run short.

"The small-business owner is the last to get paid, but many times I see doctors who won't change their lifestyles," says James P. Sacher, CPA, a partner with the Cleveland-based financial consultants Skoda, Minotti and Co.

Matthew Baker, executive director of Maryland Brain and Spine Associates in Annapolis, adds, "Everyone understands you have to pay your bills, but when you own a business your salary is a discretionary expense — you take the risk and hope to get rewarded for taking it."

SIGNS OF TROUBLE

A practice that continually comes up short on cash may have one or more of the following problems:

Physicians taking out too much compensation;
Physicians taking too much time off;
Financial mismanagement or fraud; and
Cash-flow expectations not adjusted for rising costs or changes in payer reimbursements.

Understanding your financial statements is vital. But they may not tell the whole story if your practice continues to lose money month after month, says Sacher.

Even careful, regular scrutiny of your practice's financial statements may fail to alert you to your real debt situation. You know there's money in the bank, but "You have to be asking, how does that money get in the bank?" says Sacher. "Maybe it's because you have a line of credit that you keep drawing on."

Borrowing to make payroll is OK once in a while. If you pay staff every other week, there will be two months of the year in which you will have to fund three pay periods. Quarterly malpractice insurance payments, physician vacations or illnesses, and bonus distributions in December — often the slowest month for charges — can also cause cash to run short the following month, Sacher says.

But frequent dips into your credit line to meet payroll or other expenses such as loan payments is a sure danger sign. Getting turned down for a loan by your regular commercial bank is also a red flag indicating you're in too deep.

Sacher and other experts recommend tracking your practice's cash flow by monitoring your gross and net charges and incoming cash on a weekly basis. Comparing each week to the same week of the previous year can help you spot negative cash flow trends.

NO BENCHMARK

But surely there's a handy benchmark you can apply to help you determine the "correct" amount of debt you should have, isn't there? Some debt-to-income ratio you can plug in to know how you're doing? Unfortunately, no. The great variety of different types of medical practice<

For Healthcare Professionals