Financial Risk Management
In business, as with most precious things in life, protecting what you have is fundamental. A key aspect of financial sustainability for a practice is to continuously take simple, yet crucial, safeguarding steps. Maintaining these protective measures ensures you don’t suffer major losses from either a significant single setback, or multiple episodes of incidents. This process is known as financial risk management (FRM), and it’s essential for your practice’s financial health. In this newsletter, we’ll address the most important aspects of FRM.
FRM can be summarised as the process of identifying, assessing, and controlling threats to an organisation’s capital and earnings. These threats are deemed risks. You should regularly schedule time to thoroughly evaluate these risks through FRM. The old adage of “plan for the worst and hope for the best” is very relevant here! Beyond protecting yourself from financial risks, performing FRM will also create better operational sustainability, which further increases the value of your practice.
What are the
types of risks?
01 Internal and controllable risks
Financial Risk Management: These risks refer to factors within a business that are of a preventable nature.
02 External risks and uncontrollable risks
Financial Risk Management: These risks refer to factors beyond the control of your practice, which are not preventable.
Risk mitigation via Insurance
Insurance will always be a critical tool for mitigating future risks. However, insurance has developed distinct products over time and it’s vital to understand precisely what is and isn’t covered in each offering. At least once a year, it’s paramount to review your insurance policies with your broker.
It’s also worthwhile to mention that insurance is an expense where a practice can save money by occasionally obtaining third party quotes to ensure your broker is truly looking after your best interests. Nonetheless, if you do re-quote, it’s still your responsibility to understand exactly what is covered and be mindful of exclusions and possible co-payments.
The primary insurance policies to note are the following:
- Short-term insurance - Short term insurance covers you and your practice against any short-term damage that your practice may incur as result of theft or damage to property or equipment. For example, damage could result from a flood or an electrical storm. Premiums are paid to insure you can repair or replace what has been damaged. Traditional short-term insurance covers buildings, building contents, vehicles, and ‘all risk’ insurance for specific, more expensive items. You must ensure that correct and updated values are documented to prevent being underinsured.
- Fidelity guarantee - Fidelity guarantee insurance is an indemnity policy that covers loss of property or money as a direct result of fraudulent acts by employees of the insured. The policy is also referred to as ‘Staff Honesty Policy,’ because it essentially covers the dishonesty of staff.
- Malpractice insurance - Medical malpractice claims in South Africa are rising sharply. This increase in claims has had a direct impact on the higher premiums charged by insurers each year. We’ve also witnessed the liquidation of a major insurer this year, which creates notorious difficulties for insurers to underwrite, as cover can differ materially between insurers. Not all brokers manage this type of insurance, so it’s extremely worthwhile to obtain annual quotes. Examine quotes cautiously, though – cheap is not always better when it comes to malpractice insurance.
- Life insurance - Life insurance is a non-negotiable to have in place, especially for your family and colleagues in a group practice for property debt (or other corporate debts) in the event that something were to happen to you. As premiums increase significantly as you age, it’s best to arrange this insurance as soon as possible. Although it’s often an uncomfortable topic, it’s crucial to consider the amount of cover required to take care of immediate cash requirements if you were to pass away. Once again, it’s very important to review this annually or when circumstances change – for example, when children begin to work and are no longer your dependants.
- Sickness and/or disability - This insurance acts as cover when you are not able to work up to retirement age and protects you against potentially being unable to earn an income. It’s generally a flexible type of insurance, with different options for a lump sum payout or monthly premiums until you are able to work again.
- Dreaded disease - Dreaded disease cover policies pay out a tax-free lump sum if you are diagnosed with a critical illness, such as cancer or heart disease. You are usually required to have certain medical examinations, depending on the amount or level of cover required.
- Business continuity/Interruption - Dre Business continuity or interruption insurance is important to cover loss of revenue due to an unforeseen event. It is primarily earmarked to cover overhead costs and business expenses such as staff salaries, payments to suppliers, and rentals. The goal is to help a business return to the same financial position it experienced before the impacting event. It’s vital that the business is adequately covered, so it may be best to opt for a longer period to be covered to avoid being caught out.
- Key person insurance - This insurance is for group practices in which you insure the income of one or more partners that usually contribute a significant proportion of the total practice income. It also covers recruitment costs for replacing the key person, as well as any training required. Additionally, this insurance can cover key staff, such as a practice manager or experienced assistant.
- Buy and sell - The purpose of a buy-and-sell agreement is to provide the surviving co-owners of a business with cash to purchase the interest of a deceased co-owner. According to the agreement, each co-owner takes out life cover on the other co-owners’ lives. The life cover pays out on the death of a co-owner, which funds the purchase of their interest by the surviving co-owner(s). Buy and sell insurance plays an important role in providing comfort in the sense that the deceased’s family will be paid out, as the remaining partners don’t have to scramble to purchase the shares. This also removes the potential loss of a previously earned salary, which may have supported the deceased’s family. From the perspective of the surviving shareholder(s), buy and sell insurance offers the reassurance that an unknown person will not be introduced to the management of the practice, preventing possible conflict. Furthermore, it prevents problematic situations in which the remaining doctor(s) do not have the financial resources to purchase the equity. Disability cover can also be included to fund the buyout of a disabled owner’s share of the business.
Risk mitigation through attention to staff
Despite South Africa’s very high unemployment rate, we experience the paradox of a severe shortage of skilled workers for the modern economy. This is particularly true for the medical industry.
Staff are often overlooked when considering mitigating risks to your practice. However, employees are one of the most pertinent aspects of operation. The staff are often the face of the business, as they primarily interact with your patients. As with any other business, customer experience is vital to ensure that patients return. For this reason, it’s imperative to view your staff through the lens of financial risk management.
We recommend assessing the following basic considerations:
- Are your staff happy – In most instances, there are simple indicators that demonstrate that staff are not happy, such as:
- high staff turnaround;
- absenteeism or frequent lateness;
- elevated patient complaints;
- disengagement of staff; and
- complaints from staff.
- Management of staff – Staff need to be monitored and managed frequently, yet doctors often don’t have time to schedule staff meetings. As a result, this falls on practice managers who are not always well-equipped to manage staff. In turn, this can lead to conflict. Another pressing issue is that doctors don’t always ensure that staff are remunerated in line with market benchmarks. Staff, on the other hand, usually have an established idea of the monthly revenue generated by a practice. Over time, this combination can lead to an environment that fosters a level of entitlement. In most instances, staff do not fully comprehend the costs incurred in running a practice and what a doctor takes home. This important context should be clearly provided, rather than avoiding difficult conversations.
We suggest the following actions to mitigate risks associated with staffing issues:
- Conduct a benchmark review of market-related salaries for your staff to see whether they are aligned.
- Schedule at least one monthly staff session, which can outside hours according to everyone’s convenience.
- Review your overtime policy. Is it a fair and workable protocol that regulates overtime?
- Consider the growth of your staff. Do you provide opportunities for training, learning, or further education? This often reflects that staff are valued and is worth far more than the costs incurred and time forfeited.
- Evaluate your staff’s workload. Are they overburdened with work? It is a good idea to compare your growth in revenue over time versus the number of employees at your practice, where relevant.
Ensuring that staff are retained and happy is paramount for the sustainability of a private practice in South Africa, and safeguards you against some of the largest threats to your business’s health.
