Before You Worry About Profit, Focus on These Things in Your Medical Practice

Initially, when I begin to work with most small practices, I discover they have been focusing on the wrong things in their business. Many seem to be obsessed with profit, yet wonder why they continue to have difficulty. At first glance, it might sound crazy, but profit shouldn’t be a top priority of a small business. Ultimately, profit is necessary for continuing growth and longevity. However, there are other important areas to focus on, and if you do, profit becomes easier to attain. If you focus on the wrong stuff, you can earn a profit on paper but still go broke.

If your first area of focus isn’t profit, what should a small business or practice focus on then? There are three important aspects a leader should concentrate on - cash, access to capital, and establishing good controls. Many small practices fail because they lose focus on one of these areas.

Cash is the lifeblood of any business. Run out of cash, and the company dies. The first area of focus for any practice is how much cash they have on hand. When you examine a balance sheet, cash should be the first line item your eyes go too. How much cash is on hand? If it is low, is it enough to cover the daily operations for a week, a month, a quarter? Set a threshold on the cash balance in your practice and monitor it. If the cash balance dips below the threshold, alarm bells should sound, and urgent action should be taken.

The second problem area for small practices is their ability to raise capital to expand their services or daily operations. Capital comes in two forms - equity and debt. Ensure you have access to both. Equity comes from the owners and other investors. Going back to the owners and investors for more money can be challenging. The second source, debt, may be easier to achieve, and always have access to your credit before you need it. Having a line of credit before you need it is an easy way to improve the chances you’ll survive a cash crunch.

Finally, make sure you are in control of the business’s expenses, inventories (if you have them), and receivables. Of the three, the expenses and receivables are the most important. Out of control expenses can eat up any profit and consume the cash quickly. Establish, i.e., budget, for your costs and track them. Know if they are rising and why. Making sure you get the money you’re owed is just as important. Track your receivables and know who is late paying you.

Cash management is key to the survival and success of any practice. Focus on the cash flow through the business, ensure you’ve got enough cash on hand, and get some if needed. Please make sure your expenses on in control, and people are paying you what they owe. All of these things will lead to profit if done correctly. Make a plan for the worst-case scenario. A banker once told me, “Assume your bills will be paid sixty days early, and folks will pay you sixty days late.” When you’re managing the cash flow of the practice, that’s not bad advice.

David J. Norris, MD, MBA, is a practicing anesthesiologist in Wichita, Ks. He is the author of The Financially Intelligent Physician and Great Care, Every Patient and is a frequent speaker on physician finances. Read more about David at www.davidnorrismdmba.com.