Financials 101: Spotting Red Flags

This month in my Financials 101 series, let's talk about spotting red flags in your medical practice.

Running a medical practice isn’t just about saving lives; it’s about keeping your business healthy too. And just like early detection is key in medicine, spotting financial red flags early can save your practice a lot of pain (and paperwork). Let’s take a moment to talk about what to watch out for, so you can address issues head-on, long before they snowball into a full-blown crisis.

Financials 101: Spotting Red Flags

Financial Stress: Symptoms to Look For

Think of financial stress as your business’s way of waving a “help!” flag. Here are some of the more common signs to look out for.

1. Profit Drops Without a Clear Diagnosis

   Profits can dip for obvious reasons—January holidays, public holidays in April, or when your star-billing doctors are off exploring Europe for two months (lucky them). But when profit takes a nosedive and you have no clear explanation? That’s when you need to dig deeper. Unexplained drops in profit are like a headache with no known cause: it might be stress, or it might be something more serious. Don’t ignore it.

2. ATO Debt That’s Sneaking Up

   If you’ve always paid your BAS and super on time, and suddenly you’re struggling to meet those deadlines, it’s time to ask: Where is the cash going? Something has shifted. Consistently missing ATO payments isn’t just a warning sign, it’s a flashing red light on your dashboard. You need to plan for those bills like clockwork because falling behind on them can crank up your financial stress and make matters worse.

3. Trouble Paying Bills

   If your payable accounts are piling up and you’re not able to keep up with supplier payments, it’s usually a sign that your cash flow has taken a hit. Don’t let this linger. Figure out where the bottleneck is and clear it sooner than later, because a snowball in accounts payable usually leads to an avalanche.

4. Reliance on Incentives to Keep the Lights On

   If you’re holding out for quarterly incentives to fix cash flow issues, that’s a sign the service fees you’re collecting aren’t covering your daily expenses. Incentives should feel like a bonus, not a lifeline. It’s time to examine the way you’re allocating revenue and start giving your margins some TLC.

5. Too Many Overdrafts and Payment Plans

   If overdrafts are more of a habit than an occasional fallback, or you’re using payment plans to cover regular expenses, there may be some deeper issues with your cost structure. Think of it like a pressure bandage: it can keep things together for now, but it’s not a long-term fix. (Pro tip: get help with those allocations. It makes all the difference.)

6. Staff Costs Ballooning Beyond Healthy Limits

   Yes, staff turnover or training new hires can temporarily increase costs, but chronic, sky-high staff costs are a more serious issue. If your staff expenses consistently eat up too much of your provider billings, you’re setting yourself up for long-term financial stress. And while bringing in locums or contractors can help fill gaps, relying too heavily on those high-cost options can be unsustainable.

7. Your Drawings Are Exceeding the Practice’s Profits

   While it’s absolutely fair to pay yourself for your hard work, there’s a limit. Regularly taking more out of the practice than what it earns in profit, unless you have prior savings or profit reserves, is a fast track to financial trouble. It’s the business equivalent of eating your seed corn.

8. No Regular Financial Reporting or Reviews

   Picture this: you’re flying blind. You’re spending money, hoping you’re staying afloat, and waiting until year-end to visit your accountant, only to hear them say, "You’re in a bad spot, Bob/Sally." That’s what happens when you don’t review your numbers regularly. Frequent financial check-ins are like regular health checkups; they keep you out of trouble.

Fraud-Related Red Flags: Be On the Lookout

Financial stress is one thing, but fraud is a whole other monster, a preventable one, with the right tools and vigilance. Here are the red flags to keep in mind:

1. Spikes in Expenses with No Clear Reason

   If a cost, say medical supplies, suddenly doubles, and there’s no plausible explanation, it’s time to investigate. Check invoices, suppliers, and payments. Fraudsters thrive in confusion, so eliminate it by staying on top of the details.

2. One Person, Too Much Power

   When one staff member controls billing, payroll, and banking, that’s a recipe for trouble. In accounting, this is Fraud 101: a lack of separation of duties. Separate those responsibilities, stat.

3. Frequent Write-Offs or Refunds

   Write-offs and refunds aren’t unusual, but if they start popping up more than usual, dig deeper. Audit them with a tool like Cubiko, or use your practice management software to review and verify that they’re legitimate.

4. Neglecting Bank Reconciliation

   Reconciliations are your first line of defense against missing funds. If no one’s keeping up with it, you’re creating a blind spot where fraud can fester. Regularly reconciling your bank transactions should be non-negotiable.

5. Suspicious Supplier Invoices

   Fraudulent invoices can look real. People have been known to create fake ones, run them through the accounting system, and then pocket the payments. Validate your supplier details to confirm legitimacy and put safeguards in place.

6. Debit Balances in Patient Clearing Accounts

   If your patient holding account has a debit balance, it means too much money is being paid out (or worse, cash isn’t being deposited where it belongs). This can be a major fraud risk if not monitored.

7. Lifestyle Changes in Key Financial Staff

   If someone with access to the financials suddenly steps out of an economy-class life and into business-class vacations and designer handbags, that could hint at something fishy. Don’t ignore your gut; it’s rarely wrong.

How a Great Accountant Can Help You

A proactive accountant is like your business’s equivalent of a great diagnostician. Yes, they’ll handle your tax return, but a good one will do so much more:

• Profit Analysis: They’ll help you understand why your profit is up or down, and how to adjust.

• Benchmarking & Targets: Your accountant should measure key metrics (e.g., EBITDA) and help set achievable goals.

• Risk Identification: Whether it’s creeping staff costs or rising liabilities, they’ll spot trouble before it snowballs.

• Process Improvement: They’ll guide you toward smarter systems and workflows so you can stay financially efficient.

If your accountant isn’t having these conversations with you, maybe it’s time for one who will.

Key Takeaways

1. Be Financially Proactive: Frequent check-ins with your financials make a big difference.

2. Make Red Flags Your Priority: Whether it’s a cash flow hiccup or a fraud risk, acting fast can save you headaches.

3. Seek Expert Help: Accounting might as well be its own language, but trust us, we speak it fluently (and we’re happy to translate!).

At GrowthMD, we get it; your time is razor-thin, your to-do list is endless, and your priorities revolve around patient care. That’s exactly why we’re here: to help you spot the problems, fix them quickly, and get your practice thriving again.