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Saturday, February 03, 2007

Going solo?: Here is a brief, incomplete, and novice view on money.

Why did you go to medical school? I’m sure you went, in the first place, for noble reasons, and medicine is certainly a noble profession. But nobility don’t pay the bills. For that you need cash. You need money. I don’t think I ever understood money until I went into solo practice. After 10 months in practice, I have a much clearer understanding of money, one in which I wish I had earlier in my career. Oh well.

Money in a medical practice, or I suppose any business, takes various forms: income, revenue, cash flow, and cash reserves.

  • Revenue is how much money comes into the practice over the course of, lets say, a year. For example, a business that does $200,000 per year in sales has $200,000 a year in revenue. A busy 4 man urology practice in Long Island may bring in $3 million per year in revenue generated from seeing patients and doing procedures. Another practice may have revenue of $1 million per year.
  • Income, on the other hand, is revenue minus expenses. If the less busy practice in the above example has $200,000 in expenses, than the income is, potentially, $800,000, divided amongst the number of partners. Not too shabby. Income is how much you make. Income is the number on the bottom of your yearly W2.
  • Cash reserves, the 3rd form of money, represents the pile of money that is left over after you pay your expenses and take your income. Cash reserves are how much you have in the bank, or brokerage account, or CD etc. In the above example, if the $1 million dollar per year practice paid only $500,000 in income to the doctors, it would have $300,000 in cash reserves, minus Uncle Sam’s cut, at the end of year. Cash reserves are extremely important because they insulate the practice from fluctuations in cash flow, can be used to secure low interest loans, and grow with interest if placed in interest baring accounts. Cash reserves keeps your business alive when things get slow and
    cash reserves enable you to grow through capital improvements.

  • Finally we have cash flow. Cash flow defines how the money moves though your practice. Cash flow is basically what happens to money once it enters your practice; where it goes, what is it used for, and, perhaps most importantly, when it leaves. Cash flow is a very important concept that you will one day become very familiar with in your new practice. Cash flow is determined by a variety of factors and is similar to expenses, but has a more dynamic quality to it. Cash flow dictates many of the operational decisions that a practice must make on a regular basis and when managed poorly, it can drag a practice down to the bottom of the sea. Cash flow is the life’s blood of a practice.

Income is what most young physicians, in-fact most physicians and most people—value most. Higher incomes are better, of course! And for employees, this is the most important number. However, as an owner I can tell you this: of the various forms that money can take, income, by far, is the least important to the growing practice. Let me tell you why.

  • Practice A has $1,000,000 per year in revenue minus $900,000 in expenses that include payroll for staff and the doctors. The corporation/practice has $100,000 left over, which the physicians take in bonus income. The following year, the sono probe breaks, is off warranty, and needs repair. The repair costs $15,000. Now the doctors have 4 options: pay cash out of their personal accounts, use a loan or line of credit, lease a whole new sono unit (this option is, surprisingly, actually not much more expensive then repairing a broken probe), or do nothing. The physicians essentially bled the practice dry by converting what should have been cash reserves into income and the emergency money will cost the practice a premium, either in higher interest rates, higher tax burdens, early withdrawal penalties, lease pre-payment penalties, etc. Emergency money costs the most to obtain, and when you don’t have cash reserves, it costs even more.

For a start-up and growing practice, in my view, the order of importance should be cash reserves, cash flow, revenue, then income.