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Whether you are a doctor, an entrepreneur, an investor, a manager, or a combination of all of these, you have one job responsibility above all others. Your ability to perform in this role will directly affect the livelihoods of all your employees, and it will affect the success of your business. For that reason alone, you should make it a priority to understand the numbers that impact your practice's bottom line. In general, owners of medical practices tend to be people who want to help others. They tend to be an entrepreneurial group with the ability to quickly learn new things, but the one thing owners tend to lack is an understanding of the financial analysis of the business.

Tip #1: Financial Things You Must Know If you do not understand how to use your monthly financial statement to change your business, you need to learn NOW! Even if you hire someone to do your accounting, you must understand a bare minimum:

  1. Your profit and loss statement

  2. Your balance sheet

  3. The relationship of #1 and #2

  4. Your monthly cash flow statement

Your profit and loss statement should report everything as a percent of revenue, so you can follow the trends they track over a specific period of time.  Always remember your accountant or CPA is exactly that. They can put things in the right column in a spreadsheet or prepare your taxes, but they are not there to utilize the numbers to run your business. That job belongs to you. If you do not understand these things, consider taking classes. Many area Small Business Associations offer monthly classes to help business owners understand the financial side of their business. There are numerous books written on the subject. It is imperative that you make time to learn how to understand the numbers of your business. Otherwise you will miss the signs that point out bad financial decisions until it is too late to correct them.

Tip #2: Tracking Success Unlike the retail industry, where assets are tangible and sold, medical practices sell a service.  In other words, the greatest asset a clinic has is it’s employees.  This also means, one of the greatest expenses a clinic can have is it’s salary.  For this reason, it is important to track your profits in relationship to your payroll expenses. To do this, you can use two formulas: Profits/Number of Employees (P/N) and Profits/Salary (P/S). If you track this number monthly, you will be able to see how much you are spending per person to make your profit.

Example: P/N If you made $500,000 in January, and you had 50 employees, your profit per asset was $10,000.  If you made $500,000 in December, and you had 40 employees, your profit per asset was $12,500. In this example, assuming the only thing that changed was your number of employees, the additional 10 employees you added in January actually decreased the amount you made per asset.  If this trend was to continue, you would need to evaluate why more employees was equating to less revenue per employee being brought in.

Example 2: P/S If you made $500,000 in January, and your payroll expenses were $150,000, your profit to asset number was 30%.  If you made $500,000 in December, and your payroll expenses were only $90,000, your profit to asset number was 18%. In this example, assuming the only change was the amount of salary paid, you would have had a better month in December with only 18% of profits going to salary, than you had in January, with almost 30% going to salary. The single number you get using either formula (or using both) is not important by itself, but tracking its trend over several months can give you incredible information.

The bottom line is, you have to understand certain key indicators in your business and know how to utilize and apply them effectively.

 

Dr. Tim Reynolds, M.D.

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Top Financial Mistakes That Will Crash Your Business. We know running a medical practice can be difficult. Most medical practice owners are physicians who graduated from medical school, not business school. Often, their teams are friends and family members with a medical background. Our goal is to educate medical practice owners, and their teams, to develop their business management and leadership skills.