Home health agencies are a unique business; from patient care and compliance to managing cash flow and profit. As reports have indicated, many home health agencies continue to struggle to find a footing and make a profit. While at the same time, other agencies are booming and doing very well. But what is the cause of this?
A large part of it is agencies that are doing well understand where their revenue comes from and where their money goes – expenses. It goes beyond how much money you have in the bank and whether the owner or directors will get their paycheck that week.
Clear financials and accounting for home health agencies go beyond computer-generated income statements/profit and loss statements from QuickBooks. A generic listing of accounts with income and expenses is not OK and really doesn’t comply with cost report standards. Setting aside the outdated cost report methodology, there is a good point to be made: the cost report detail is helpful in providing your agency with year-round data to help you make decisions.
The bottom line with detailed and well-planned accounting records is the impact on planning and decision making. By having the information available when you need it, you can make informed decisions rather than on-the-fly decisions that might sound good at first, but do not make good business sense in the long term.
Let’s go into a few familiar examples… a mid-size home health agency with about 100 patients, a diverse payer mix that includes Medicare, Medicaid, and private insurance, and is averaging $150,000 a month in revenue or about $1.5-2 million a year needs to make decisions. The agency owners and management want to review direct costs for field staff and overhead to see there is any room for improvement with cost savings. After all, the purpose of any organization, for profit or non-profit, is to make money. Some just have different ideas of how much to make.
They ask their bookkeeper, who reconciles the bank account each month, for a profit and loss statement. When they receive that statement, the past month hasn’t been completed and the owners notice that revenue is lumped together under income. The owners know that they receive antecedently about 60% from Medicare, 20% from Medicaid and 20% from private/commercial insurance. But the P & L only shows one line for income. So, what does it mean? It’s hard to tell.
The owners circle that line and move on to expenses. Wages, salaries and payroll taxes are all together. Where’s mileage? That’s under salaries and payroll taxes too. What about field staff versus contractors and office staff? That’s all under salaries and wages too. So maybe the bookkeeper just decided to condense the P & L thinking that less is more.
Wrong…that bookkeeper, who said they knew how to use QuickBooks, Sage, or some online platform, is just taking your bank statements, entering the data, checking off transactions, and clicking reconcile. It doesn’t matter that your bank balance on the balance sheet has a variance of $200,000 or that accounts receivable has a negative while accounts payable is positive (a negative amount shows up) …Their job is done…click, click, click. Talk to you next month.
This info isn’t really helping you make a decision now. You have to get your payroll reports, look at your billing EOBs, sort them by payer, and now you have to create a massive spreadsheet to even make sense of it all. But don’t worry, your bookkeeper, who is a generalist and master of the universe, will be back next month for a brand-new episode of, “if it doesn’t balance, let some one else worry about it.” A midsize small business can’t make a decision with this information! How can you become agile in responding to change with sound business decisions based on incorrect information? Let’s change that! We’ll discuss techniques to get back on track in our next post. See you next time!