How to Make Smarter Financial Decisions for Your Medical Practice
Running a private medical practice comes with its challenges, but one of the most critical areas for success is understanding your financial data. For many physicians, financial documents like income statements can feel overwhelming, but making business decisions without fully understanding your finances is like treating a patient based on inaccurate diagnostic tests. Let’s explore how to recalibrate your financial insights to make smarter, more confident decisions.
Why Traditional Income Statements Fall Short
Many practices rely on basic income statements that show total revenue and net profit. While this gives a snapshot of your practice’s financial health, it lacks the nuance needed to make informed decisions. For example, if all revenue streams are lumped together, it’s impossible to tell which areas of your practice are thriving and which are underperforming.
A lack of detailed insight can lead to dangerous assumptions, such as deciding to expand or invest in new services without knowing the actual profitability of existing ones.
A Smarter Approach: Segmenting Income and Costs
To make better financial decisions, it’s essential to break down your income and costs into distinct categories. Here’s how you can do it:
- Segment Revenue by Service Type
Identify all your revenue streams, such as physician services, nurse practitioner contributions, or specialized offerings like allergy treatments, hearing aids, or in-office procedures. Track how much revenue each service generates. - Understand the Cost of Goods Sold (COGS)
Calculate the direct costs associated with delivering each service. For example:some text- Provider Costs: The salaries of physicians and nurse practitioners delivering the care.
- Material Costs: The cost of hearing aids, allergy testing supplies, or procedural equipment.
- Calculate Gross Profit
Subtract COGS from your total revenue for each service type. This gives you a clear picture of how profitable each revenue stream is before accounting for overhead expenses. - Account for Overhead Expenses Separately
Overhead includes rent, administrative staff salaries, insurance, and other fixed costs. These should be analyzed separately from COGS to avoid conflating direct patient care costs with operational expenses. - Evaluate Net Profit
Once you’ve accounted for COGS and overhead, you’re left with net profit—a critical metric for understanding the overall financial health of your practice.
The Danger of Uncalibrated Decisions
Without breaking down your income and costs, you risk making significant decisions based on incomplete data. For example:
- Expanding your practice without realizing one service line is subsidizing others.
- Investing in new equipment without understanding its true return on investment.
- Hiring additional staff based on top-line revenue growth without factoring in the associated costs.
By recalibrating your financial view, you can make decisions rooted in clarity and confidence.
Taking Control of Your Practice’s Financial Health
Understanding your finances doesn’t require advanced accounting skills. It’s about creating a framework that provides actionable insights. Sit down with your bookkeeper or accountant to implement these changes in your income statement structure. Once your finances are segmented and clear, you’ll have the tools to make better decisions, whether it’s opening a new location, adding a new revenue stream, or improving profitability in existing services.
Stay in the Driver’s Seat
Taking control of the business side of your practice is vital for maintaining independence and long-term success. A well-calibrated financial strategy ensures you’re not just surviving but thriving. With a clearer picture of your practice’s financial health, you’ll make decisions that align with your goals and keep you firmly in the driver’s seat of your business.
By mastering these financial principles, you’ll set your practice up for sustainable growth and greater resilience in the face of challenges.
