You Can Know What You Don’t Know: How are we doing?

Continuing my series offering best practices and tips to address the many challenges executives at health centers face, this month I am addressing the topic of key performance indicators.

I hear it all the time.  How do we compare to “the benchmarks”, Karl? How do we know if our results are “right”?  I think it’s important to let “industry” benchmarks inform an assessment of your organization, but I do not think that industry data on a stand-alone basis is the only guiding light to follow.  Metrics mean something different for everybody. Everybody has different goals, values, positioning initiatives, and they are all in different places within a business’s life cycle.  

With that in mind, I encourage organizations to assess what are your goals?  Is hitting a certain benchmark the endgame? Why are you striving for a certain benchmark?  Is it for a financing? Hitting that goal will be a litmus test for hitting another benchmark? Will achieving a certain benchmark allow you to invest in a new program?  Those are the questions to be asking. Are you achieving those goals?

For example, I have worked with organizations that had a low amount of cash compared to industry benchmarks.  However there’s always a reason though, and it is not necessarily bad. Perhaps the organization is in a period of new program development, and the new program is not fully “cash flowing” yet.  Monitor and respond!

My advice to companies that are asking about benchmarks is to ask company leadership to engage in a process to help them gain some perspective around benchmarks:

1. Establish a strategy
2. ​Establish a plan
3. Understand what that plan will do to metrics 
4. Understand what you need to do to achieve desired metrics
5. Implement
6. Monitor
7. Respond

I want to clarify, though, that I do think metrics in the proper context are important.  With the proper perspective, metrics do tell a story.   

The following lists a few metrics that are indicators of operating effectiveness and liquidity:

1. Days sales in account receivable
2. Days expenses in accounts payable
3. Margin as a percentage of net revenues
4. Days cash on hand
5. Staffing as a percentage of total costs
6. Benefits as a percentage of employee compensation
7. Costs per visit and/or stated as percentages of revenues
8. Earnings before Interest, Depreciation and Amortization (EBIDA)

The following lists a few metrics commonly monitored as indicators of capital usage, and financing “readiness”: 

1. Debt as percentage of equity
2. Average age of plant 
3. Debts service coverage ratio
4. Debt capacity

Of course never forget loan covenants!  Loan document covenants have very specific definitions, reporting requirements, etc..  Rigorous monitoring is a must!  

If you would like to understand any of these metrics, please reach out, and I would be happy to have a conversation about how these metrics are calculated and/or how they may add insights into your organization.

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W. Karl Baker, CPA, spends his time thinking about ways to help organizations with sound financial decisions, including improving revenue cycle management, and access to capital.  Find more information at www.BakerCFOadvisory.com and www.InfinityCommCapital.com.