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Tuesday, September 28, 2010

Do you have a good understanding of practice finances?

One of the most startling findings to me in the National Demonstration Project (NDP) was that many of the practices did not have a good understanding of their own practice finances. In fact, at one point in the study, investigators gave up asking for balance sheets or income and expense statements as no coherent information could be assembled from the information. The information was available, just not in an easily understood form.

I have long argued that physicians (we’ll focus on family physicians here) really need business and management training. Many physicians realize this and go on to get a Master of Medical Management or Master of Business Administration, but it really doesn’t take a whole other degree to gain sound business basics in a practice. Physicians can certainly hire a manager or accountant to put a plan together and monitor that plan. However, it behooves the physician to understand and watch the plan as well.

I am lucky on this point. I work for a multi-specialty group essentially as an employed physician, and the company forms, accounts and adjusts my business plan. I've always felt a responsibility to learn about it, however, because working for a larger company can put you in a vulnerable position if you do not understand practice finances.

If you are not sure whether you have a handle on your practice finances, ask yourself the following questions: Do you have a plan? And can you produce an income and expense sheet monthly?

A simple plan starts with: What do you hope to accomplish financially in your practice? Is there a certain amount of money you expect to make each month? How much of his money is for your salary? How much is for your staff? Are there capital expenses you need to fund? Asking these starter questions can help you identify how much help you will need and from whom.

Here are some further tips to get you started in understanding your practices finances:

1. Start collecting copies of bills your office is paying.
2. Hire an office manager with some business experience.
3. Review the business aspects of the office on a regular basis, at least quarterly.
4. Methodically review collection rates from payers (monthly collections divided by charges).
5. Evaluate vendor costs for supplies on a regular basis.
6. Stock medical supplies on a par schedule (i.e., a standard monthly amount).
7. Re-evaluate duties, consolidate and promote staff.

A simple monthly income and expense statement looks as follows:

  Actual Budget Variance
 Visits 430 500 (70)
 Gross Revenues
 $36,000 $40,000 ($4,000)
 Revenue and Deductions
 Bad Debt
 $1,000 $1,000 0
 Charity $1,000 $1,000 0
 Net Operating Revenue
 $34,000 $38,000($4,000)
 Overhead Expenses
    Salaries - Staff
 $2,000 $2,200 ($200)
    Benefits - Staff
 $800 $800 0
    Consulting $350 $500 ($150)
    Med/Surg Supplies
 $3,000 $2,500 $500
    Other Supplies
 $2,500 $3,000 ($500)
    Repairs/ Maintenance $1,000 $2,500 ($1,500)
    Purchased Services
 $1,000 $1,500 ($500)
    Rentals/Leases $1,000 $1,650 ($650)
    Utilities $850 $850 0
    Depreciation $2,500 $2,500 0
 Total Operating Expenses
 $15,000 $18,000 ($3,000)
 Available for Compensation
 $19,000 $20,000 ($1,000)

The simplest expense sheet takes the revenue coming in and subtracts expenses, with the difference remaining as physician compensation. Obviously, compensation models are often much more complex than this. However, having an understanding of practice finances on this basic level is crucial. Practices should compare year-to-year costs, the percentage of total expenses for each overhead category, and actual costs versus budgeted costs to stay on track. Having an expense sheet also helps you identify the largest portion of your cost structure. You can also calculate your average income per visit (revenue divided by visits) and then use that figure to analyze your collections and the rates stated in your contracts. Knowing these types of numbers will become more and more important in our near future when negotiating for positions and with payers.

Here are some additional resources:

Running a Practice (AAFP resources)
Financial Management Tools (from the FPM Toolbox)
“Vital Signs” for Assessing Your Practice's Financial Health (FPM, Nov/Dec 2009)

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About the Author

Melissa Gerdes, MD, is a family physician practicing at Methodist Family Health Center – South Arlington in Arlington, Texas, and former president of the Texas Academy of Family Physicians.

Note: This blog is no longer updated; this is archived content.

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Real-Life Practice Transformation is a Family Practice Management (FPM) blog. However, the views expressed here are those of the individual authors. They do not necessarily reflect the opinion of FPM or the AAFP. The FPM blogs are not intended to provide medical, financial or legal advice. For more information see Terms of Use.