Careful ways to address a profit decline

Few things are more unnerving than realizing your business is less profitable than it once was—or than you counted on. The instinct to take immediate action is understandable. If you’re a physician, responding quickly to urgent situations is second nature. And after all, if your profit is suddenly on a lower trajectory, you may have reason to be concerned that you’re heading toward a personal financial emergency. Though it’s natural to act fast, resist the instinct to attempt a quick fix. Here’s what to do instead. Invest enough time to be sure you’ve accurately identified the problem. First instincts about the causes of profitability problems are often incorrect. That’s why getting a handle on the root causes of your situation is crucial—before taking corrective action. Start with a meticulous review of your financial statements and accounting data for the past few years. Compare each revenue source and expense line in detail, making sure you have all the information you need to compare apples-to-apples. For example, if your accountants have changed up your chart of accounts, ask them to help you dig into the expense and revenue ledgers to find any specific items that have increased or decreased significantly over time. Carefully consider the impact of extraordinary items, lags, and run rates. Be sure to review both year-over-year and month-by-month financial data. Any one-time expenses or revenues (e.g., an unforeseen legal expense, preventable inventory spoilage, or unexpected income like Meaningful Use payments) should be separated out to determine underlying, standardized financial performance. This will help you avoid confusion about whether specific items constitute harmful trends or are simply timing differences or extraordinary items unlikely to recur. Let’s say, for example, that you’ve hired a new physician during the year. At the end of the year, you may find that her revenue falls short of expectations. But it might be incorrect to conclude that her production is not on target. Several types of lags could affect her total for that first year. Her productivity for the final two or three months of the year will tell you more about the pace she’s