A recent study by the Medical Group Management Association found that 24% of medical group leaders benchmark on a monthly basis, 15% benchmark quarterly, and 41% benchmark annually. Even more surprising, a mere 15% of medical group leaders never benchmark. Do you use financial benchmarking in your medical or dental practice?
Financial benchmarking unlocks crucial insights into your financial and operational performance. In this article, we’ll cover the importance of financial benchmarking for medical and dental practices, including which benchmarks to use and how to evaluate the results.
What are the Benefits of Financial Benchmarking?
Financial benchmarking does more than help medical and dental practices gauge financial performance. For one, financial benchmarking leads to more informed business decisions and agile planning. Let’s say that you track revenue growth each quarter and uncover that you have been consistently increasing gross revenue by 10%. Equipped with this information, you may proactively hire a new hygienist or nurse to continue growing your practice.
Additionally, financial benchmarking results in improved margins through more effective cost controls and oversight. For example, if you notice that your marketing budget has doubled over the past year with no tangible impact on revenue, maybe you decide to take your advertising in a different direction. Other benefits of financial benchmarking include continuous improvement, higher patient satisfaction, and optimized resource allocation.
7 Financial Benchmarks to Use and Why
The financial benchmarks you adopt in your practice will depend on your goals and operations. Nevertheless, here are seven financial benchmarks to use and why.
Overhead Ratio
Overhead ratio measures the percentage of your revenue that goes toward operating expenses, excluding owner compensation. This ratio helps you understand how efficiently your practice is running. A high ratio could indicate inefficiencies in staffing, rent, and supply costs. A good ratio will depend on your specialty. For example, a strong ratio in a private medical practice will differ from a dental practice, which is why working with a healthcare accountant to uncover a reasonable ratio for your operations is important.
Net Collection Rate
Net collection rate uncovers the percentage of revenue you actually collect compared to what you’re entitled to collect after insurance adjustments. Ideally, your net collection rate should be between at least 96% and 99% within 90 days. This means you’re collecting the money owed to you. A low rate might indicate billing or coding issues or ineffective follow-up procedures on patient balances.
Accounts Receivable (A/R) Aging
Accounts receivable aging measures how long it takes your customers to pay you. The sooner you can collect patient balances, the better. Ideally, all of your balances should be collected within 90 days.
Staff Cost as a Percentage of Revenue
Staff cost as a percentage of revenue outlines how much of your revenue goes toward paying your staff, both clinical and administrative. The owner or doctor’s salary is excluded from this calculation. Labor is usually your largest expense. Staff costs that are too high will impact your profit margins. On the contrary, too low of staff costs could highlight your practice is understaffed or under delivering services.
Revenue per Provider (or per Chair/Operatory for Dental)
Revenue per provider uncovers the average revenue generated by each provider or operator in the practice. It’s a figure that’s specific to each type of physician or dental specialty. This tells you how productive your space and team are. A low revenue per provider could hint at underutilized resources or poor scheduling.
Profit Margin
Profit margin tells you how much of your revenue is left as profit after all expenses, including owner salary, but before you pay taxes. This is your bottom-line number that outlines how financially healthy your practice is. Strong margins allow for reinvestment, stability, and better owner compensation.
Number of New Patients per Month
The number of new patients per month gives you insights into your growth. Some practices count the total number of new patients per month, while others break down counts by type of patient. Tracking this number monthly lets you know important information about how patients find your practice and how you can better serve your patient base. You should be attracting more new patients than you lose each month.
How to Implement Financial Benchmarks
Implementing financial benchmarks into your medical or dental practice doesn’t have to be overwhelming. In fact, there are only four steps to the process:
- Gather Internal Data – first, you want to review your internal data. Look at your income statement, balance sheet, and statement of cash flows to see what type of metrics you need to track.
- Select Your Benchmarks – After reviewing your data, select your benchmarks. Consider starting with the above seven benchmarks.
- Establish Baseline Data – Now, you want to establish your baseline data per benchmark. Calculate each benchmark for the last period, such as last month or last quarter.
- Compare New Data – After your defined period has ended, update your benchmarks and compare the data. Did your business improve? If not, what actions are needed?
If you’re not tracking benchmarks, the most important part of this is to get started. Pick one or two benchmarks, follow this process, and keep it simple. Give yourself a few quarters to get experience tracking them and work out the kinks. Then, you can add more.
Summary
Deciphering your ratios can be confusing, especially if you’re new to financial benchmarking. Unfortunately, a “good” ratio will be unique to your organization, which is why it’s important to work with a healthcare accountant to identify benchmarks for your practice. If you have questions about the importance of financial benchmarking for medical and dental practices, please contact us.