Monitor your practice’s
financial vital signs
Brad Davis | TMA Practice Consulting
Regardless of your practice model, having an independent practice is more than
simply practicing medicine — it’s about the business of medicine. Physician
practices are relatively stable, unlike restaurants, bars and other businesses that
have a 50-percent failure rate. The physician practice failure rate is low because of
physician retention and population needs; regardless, every practice can benefit
from these signs and tools to help assess their financial viability.
CREATE A FINANCIAL PLAN
A financial business plan, also referred to as a proforma, is a tool
that assists in getting the practice funded and sets expectations for
income and expenses. Your practice management consultant or
CPA can and will help you develop this.
Why it is important
Having a plan provides a working budget of what you can afford,
such as size of staff and type of EMR. A formal plan also is needed
to obtain a startup loan and line of credit (working capital). More
importantly, a plan helps you set expectations and goals, and answer
questions such as, “How long do I have to ramp up?” “Should I
add a partner later?” “Should I add a nurse practitioner or physician
assistant?” Understanding the numbers will help you understand
your stability. Even for physicians with an income guarantee, the
hospital will not cover all your expenses, so you’ll need a financial
plan to know what to expect financially.
What is included
• Setup expenses — all costs associated with opening your doors,
such as medical equipment, furniture and credentialing.
• Monthly/annual operating expenses — staff, rent, supplies.
• Three-year cash flow projections. TMA uses MGMA (Medical
Group Management Association) benchmark data by specialty
(specific to Texas when available) for revenue estimates.
The first year of the three-year plan includes a two-part expense
outline: startup costs/expenses (build out, chairs, supplies — onetime
costs that can be financed) and ongoing monthly costs. Be
mindful that over the three-year period, certain ongoing costs will
fluctuate, so an overestimation of expenses is suggested.
For the three-year cash flow projection, use practices that have
similar set-ups and location settings to yours as projection examples.
For example, use MGMA compensation reports as a guide, with the
first 6 months at the 10th percentile. Over the three-year period, ramp
6 Dallas Medical Journal December 2018
up to the 50th percentile. If you are changing practice situations, it is
suggested that you decrease your present volume by 20 to 30 percent
for the first six months. You’ll also need volume estimates.
The proforma also should consider lines of credit. Banks
considering a loan are interested in both volume and
reimbursement. Bankers do not know the average reimbursement
and volume for each specialty. The better the business plan, the
easier it will be for financial institutions to understand how their
investments will be used and when they can expect a return. The
more successful loans show a profit within six to nine months of
the first year. Banks sometimes will approve loans with specific
specialties that require more expensive equipment where profits
may not be seen until the second year.
Banks will require documents including a tax-ID number, two
or three years of tax returns, personal income statement, threeyear
financial plan, residency certificate, and proof of insurance.
Some banks offer a conventional loan (not small business loan,
which requires 10 to 20 percent down) or an interest-only period
(between 6 months to 2 years), or low interest rate (prime + .5
percent). Banks may want to see a life insurance policy.
Loans typically have seven- to 10-year terms. Be mindful of
prepayment penalties because many offices will be profitable before
the loan terms. Some institutions may want 5 to 10 percent down
on the overall loan, which also should be a factor when you create
the initial plan. Ultimately, you want to overestimate expenses and
underestimate revenue. Most practices have a negative bottom line
for the first four to six months, and sometimes up to a year.
KNOW DUE DILIGENCE BENCHMARKS
You’ll want to understand the health of your practice and whether
you need to adjust your financial plan. Below are some terms you
should understand:
Gross charges: Dollars billed to patients, insurance.
Your Practice