Financial Intelligence - The Missing Part of Medical Education

I remember the first time I was handed the financial reports of my group practice. I asked myself, “What am I looking at?” I felt confused. I didn't know what all the line items were. I didn’t know what the numbers really meant. I acted like I knew what I was reading and let my pride get in the way of my performance.

Then a little voice inside my head said I needed to learn and master the knowledge. I wanted to be able to contribute and not only understand but affect the numbers on the page. I've always been someone who is continuously looking to improve myself. Never stop learning has been my motto. I also discovered understanding financial statements isn’t hard or complicated. It’s merely a different set of rules, concepts, and words to be learned.

I'm Not Alone, and Neither are You

I’ve spoken with many groups and physicians across this country. The most common thread I’ve seen in our conversations is a deficit in financial intelligence. Many physicians are in the same boat I was. It's funny; they'll admit it to me in confidence, but not in front of others. I'm just happy they admit it to themselves.

If you want, you can easily master the financial reports. An integral part of your financial intelligence is knowing how to use the data in these reports. There are three basic financial reports you will want to examine on a regular basis.

The P&L - The Income Statement

The income statement also known as the profit and loss statement is a critical report and the one most people look to first. Here you find how much money came into your business and how it arrived. You also see where your money went. At the bottom, you’ll see how much money is left. Always look at the income section to see where the money is coming from and how much is coming in. It can provide clues as to where can you grow. The expense section shows where the money is going, where can might be able to save and are you being efficient with our money. The critical thing to keep in mind is that the income and expenses are what make the bottom line - the net income. Don’t look just at the bottom line. Instead be diligent and focus your attention on the revenue and expense sections. Look for trends and ask questions when you don’t understand something or things just don’t make sense.

The Balance Sheet

The balance sheet is something that you will want to watch carefully. Bankers always ask for this report. It shows how well you’ve managed your cash, assets, and debt. The report is based on the accounting equation. Assets = Liabilities + Equity. You might see this in your personal finances as Equity = Assets - Liabilities where your Equity is your Net Worth. On the balance sheet, you will want to watch what your cash is doing. How much cash do you have in reserve? Is it enough? Can you meet for expenses or will you need to borrow? What are your liabilities are doing? Are they growing or shrinking? What are your assets doing? Have you invested correctly? If you borrowed money, why? Are you investing in assets that produce revenue? Or is the borrowed cash going to meet your day to day operational costs? One is a sign of strength and positive future outlook. The other is concerning and a sign of weakness.

The Cash Flow Statement

This report is a powerful report and reveals exactly where your cash is coming from. It can show you how much cash your day to day operations and investments are generating. It will show you where and how much cash is leaving your company. Cash is the lifeblood of any business, and it's important to see how the cash is flowing through your business. If you aren’t getting this report from your accountant or management company, ask for it.

Always ask why

Don’t let pride get in the way of your success. As you read these reports, always ask yourself, "What does this number represent? Why is it there?" Look for the trends and ask "Why is this trend occurring? What decision led to this change?" If you cannot find the answer, then you know you have some investigating to do.

In my next article, I’ll discuss some tools you can to see how healthy your practice is financial. If you want more information about these reports, look at my book, The Financially Intelligent Physician: What They Didn’t Teach You in Medical School. In it, I go into depth about the financial reports.

Wishing the greatest of success in your practice,

David