A recent evaluation of top-performing companies turned up some common characteristics. Among them was “controls,” or B-school speak for the system that alerts management to deviations from expected conditions. For example, a budget variance report is a way to alert management that revenue or expenses deviate from the expected (the budget) and, thereby, may be a part of the system known as “controls.”
The objective of controls is to allow management to make accurate and timely adjustments to the environment the business is in, whether external or internal. Having good controls goes well beyond your company's budget and, thus, can't be limited to management information found in financial statements. Such information includes market share, market penetration, throughput, quality, activity costs, payer mix, product mix and productivity.
- Market Share
Market share refers to the percentage of a market's expenditures a company receives. The revenue component of market share comes from the income statement, but the market information comes from census and/or economic reports. Some sources of market information are CMS, the U.S. Census Bureau, health organizations and state health agencies. Most managers wish to increase their share of the market because it indicates that a company holds a better position in the market than at least one of its rivals.
- Throughput
This is about the number of widgets in a time frame that a company produces. A commonly mentioned throughput measure is deliveries per day. The source of this information is from operations documents, i.e., signed delivery tickets. Throughput information can be acquired for each company process and each job description. Efficient companies manage throughput, which means they measure it, too.
- Quality
A good definition of quality is “meeting the customer's expectation.” Each business has both external and internal customers. Failing to meet their expectation generally results in performing an activity a second time without creating new revenue, but it can be much worse. Quality is measurable, but it might require a little thinking to decide how to measure the quality of a process or activity. An example is claim submissions. The quality of submissions can be measured by denials, which (for most payers) are the result of failing to meet the payer's expectation. Managing quality requires operational information that can't be found on the income statement.
- Payer Mix
The objective here is to understand what percent of revenue is derived from a payer or, more commonly, a payer type such as Medicare or managed care. The customary source of payer mix information is the billing system. It will provide the amounts billed to a payer or payer type, but may not do the math to show the percentage of revenue by payer. Export this data to a spreadsheet and let it do the math. Knowing your payer mix helps to set targets for managing gross profit, market opportunity, the impact of anticipated changes in reimbursement and more.
- Product Mix
Here the objective is to understand the percent of revenue that is derived from a product or product line like respiratory, rehab, DME rental or supplies. Some companies construct the chart of accounts and income statement to reflect revenue by product line. That is good because the financial statement is providing needed information. If the income statement is not structured to give this information, however, the billing system is. Once again, getting this information can usually be accomplished by exporting data from the billing system to a spreadsheet. This information is great for dealing with the same issues as those for payer mix.
- Productivity
This is the single most important piece of information discussed in this article. Productivity is also called “sales per employee.” Financial statements report one component: sales. Employment information has to come from other reports. It is important because it defines how well a company is spending that portion of revenue related to salaries and wages. This is often 20 to 30 percent of revenue and second only to the cost of goods. Managing productivity is as important as managing sales and the cost of goods — and it is easier to improve productivity than it is to improve your gross profit margin.
Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. He can be reached at 321/752-4514 or by e-mail at wweeks@weeksgroup.com.
