Understanding Your Medical Practice Finances in Minutes
Taking Control of Your Practice's Finances (Part 1)
This series will be your crash course in understanding the key financial "vital signs" of your pain management practice. Just like you wouldn't treat a patient without a proper diagnosis, you can't optimize your practice's health without understanding its financial well-being.
Learning basic finances means:
Understanding how you are making money,
Investing it wisely to generate more money,
Deciding when it's time to treat yourself and celebrate success.
The Financial Trinity: Three Statements, One Powerful Punch
We'll focus on the "Big Three" of financial statements: the Balance Sheet, the Income Statement (Profit & Loss), and the Statement of Cash Flows. Think of them as your practice's MRI, health checkup, and oxygen monitor.
In this first part, we'll tackle a quick 5-minute breakdown of each statement. These five minutes can make you (or save you) an extra $50K if you really focus on it. Don't worry; future articles will go deeper and further equip you to master these financial tools.
1. Balance Sheet: Your Practice's MRI
Imagine the balance sheet as a detailed MRI of your practice's financial health, captured at a specific point in time.
It outlines what your practice owns (assets) versus what it owes (liabilities), with the difference between these two being your equity (net worth).
Think of your C-arm machine – that's an asset. The loan you took out to buy it? That's a liability. The difference between the two? That's your equity in the machine.
Example: If your practice owns a C-arm valued at $40,000 (asset) and owes $10,000 on it (liability), the equity in the machine is $30,000.
Some Uses of the Balance Sheet:
For example, suppose your practice owns more assets than it owes in liabilities. In that case, you might be in a good position to invest in the latest pain management technology, offer new services to your patients, and potentially increase your income.
If what you owe in liabilities exceeds what you own in assets, you need urgent care, such as cost-cutting measures, renegotiating loan terms, or finding new revenue streams to better Balance your 'financial health' and return to a more stable state.
Quick Poll: What's your biggest concern regarding your practice's Balance Sheet?
How much do you owe to lenders?
How much are your assets worth if you sell them?
How much money do patients owe you?
2. Income Statement: Your Practice Health Checkup
The income statement, or Profit & Loss statement, shows the financial performance over a period of time (month, quarter, year).
It basically reveals if you're making more money than you're spending (profitability).
It details your Revenue (ex. patient consultations, procedures, and treatments), your costs (ex. rent, utilities, insurance), and expenses (ex. medical supplies, staff salaries).
Example: Dr. Feelgood's practice raked in $200,000 in revenue from procedures last quarter, but their expenses and costs amounted to $150,000. What's Dr. Feelgood's net income (profit) for that period?
Some Uses of the Income Statement:
The income statement shows that some procedures make more money than others. You might decide to invest in additional training for staff or purchase specialized equipment to expand these services and advertise more aggressively to attract patients seeking those specific treatments.
The income statement reveals that certain operational costs, perhaps rent or utilities, have risen significantly in your area and are depleting your practice's profitability.
Possibly, it is time to increase the use of your space by adding more treatment options;
Or sub-leasing space to a different medical specialty.
Or downsizing or relocating the practice, or even transitioning some services to telehealth to reduce the need for physical office space.
Quick Poll: What's your biggest concern regarding your practice's Income Statement?
How much revenue are you producing?
What cost you the most (building, salaries, equipment, medications, sales & marketing)?
What is your taxable income?
3. Statement of Cash Flows: Tracking Your Practice's Oxygen
Cash behaves exactly like oxygen; you start running out of it, and down you go. You have plenty, and off you go!
The Statement of Cash Flows tracks the cash coming in (inflow) and going out (outflow) from different areas:
Operations: Think of patient payments coming in (inflow) and rent or utilities going out (outflow).
Investments: Could be selling old equipment (+ inflow) or buying a new machine (- outflow).
Financing: This could be getting a loan from an investor (+ inflow) or repaying a loan (- outflow).
Let's Practice! Imagine your clinic starts April with a $100,000 bank balance. Throughout the month, you receive $50,000 in collections but also pay $30,000 in operational expenses and a $1,000 loan payment for an RFA machine. What's the clinic's cash position at the end of April?
Initial Balance: $100,000
Cash Inflows (Patient Payments): +$50,000
Cash Outflows (Operational Expenses): -$30,000
Loan Payment for RFA Machine: -$1,000
Ending Balance: $119,000
Some Uses of the Statement of Cashflow:
We want to increase the inflow of oxygen! Here are a few ways:
Increase revenue with this formula:
Number of patients x avg collection received per visit x patients visits.
An increase in any of these three variables will do, but being able to increase all three is exponential.
Acc Receivables vs Acc Payable: Receive cash from your customers faster than paying your vendors. For example, collect your accounts receivable in less than 15 days and pay your accounts Receivable in 30-45 days.
Inventory: Maintain as little inventory as possible, which means having money staged. Order smaller quantities more frequently. Yes, prices might increase, but please do the math and quantify the benefits of less storage space, less risk or expirations, or loss/damage.
Quick Poll: What's your biggest concern regarding your Cash Flow?
Are you running out of cash in some months of the year?
Which insurances/plans are paying more and faster?
Are my investments increasing (or depleting) my cash?
And lastly, a few essential points
Practices get in financial trouble because they confuse being profitable with having cash available. These are two very different things.
The net profit you see on your Income Statement is NOT money in the bank. You can have a big profit number for the month – on paper - and zero money in the bank.
Manage your daily practice finances with your cash flow statement and ensure you don't run out of cash. Review the other two statements (BS, P&L) at least once a month to adjust your growth strategy.