To make the point clear let me use some examples:

SCENARIO A: Imagine you are in a medical practice, practicing medicine and your yearly earning reports looks as follow.

Gross Revenue: $200,000 per year.

Overhead: $150,000 / year  [Overhead is the cost of doing business eg. expenses including rent, nurse salary, equipment and supplies cost etc.]

 In the above scenario, a physician is better off being an employee than a partner in the medical practice. Why? Because a physician employee salary is guaranteed. Even though there is $200,000 in gross revenue, the net profit is only $50,000 and would be the take home income of a medical practice partner.

Lets look at another aspect:

SCENARIO B: Few years later, your  earning reports look like this:

Gross Earnings: $500,000 / year

Overhead: $ 200,000 / year 

 As you see, the increase in gross earning does increase the overheads, but not proportionately. The increase in overheads is because of increased volume of patients resulting in increased use of supplies and increase in the number of support employees. The disproportion is because of fixed costs such as rent and malpractice insurance. But here the Net Income is $300,000 and would be the take home income for a partner in the medical practice. If, as an employee, a physician is being paid significantly less than this amount as salary, then it makes more sense for him to buy in and become a partner in the medical practice.

If the salary is only few thousand dollars less than the above amount, the only reason for becoming a partner is for job security and sense of ownership. Because, with partnership in the medical practice, also comes the never ending responsibility of managing the business aspect of it.

Before a physician even raises the issue of becoming a partner a look at the current year earnings’ and projected earnings in the next few years, is vital. Nobody wants their income to go down. Especially if you have to pay money to buy into the business. If the numbers don’t look right, it is probably better to wait an year or two before reconsidering the medical partnership.

This is the biggest problem with those jobs which offer mandatory partnership in one year. The problem is that the physician has no clue what his earning will look like at the end of the year. So for accepting a physician job with an opportunity for partnership, make sure becoming a partner is not manadatory in the contract, to continue practicing in the same medical practice. 

Why should you learn these fundamentals? Because you will be employing staff. And it is your responsibility to provide them with a stable and flourishing employer (aka job safety). So it is not selfish – it is altruistic.

Before we go around looking for bankers to finance the medical practice there are lot of things to understand. You should be able to talk finance before getting financed. Here are few of the terms and concepts you need to understand before opening the business.

1) BUSINESS PLAN: It is a written document which describes the business (in this case a medical practice), its operations, allocation of funds, staffing etc.. Not only you need a the business plan for the banks, but you may need to use it to refer to during the course of the business. It is the map to success.

2) CASH FLOW: Cash is the lifeline of business. It is like the blood in your body. When the cash runs out–the business dies. Even if there was a good chance of success few weeks later, a cash strapped business cannot survive.  Just recently I was shocked to see the doors  shut down on an upscale restaurant in my neighborhood after just one year of opening. There were lot of customers (Including me!) but I guess they let expenses run high.

3) REVOLVING LINE OF CREDIT: It is a loan offered to the medical practice for its operational and daily expenses. You can withdraw it all at one time or slowly, leaving some for the rainy days. As you pay it back, it increases back to its original value.

4) CASH FLOW STATEMENT: It is a projected expenses and earnings on an excel sheet on a monthly basis for atleast an year.

5) BREAK EVEN POINT: The time or earning at which the medical practice becomes profitable. On your cash flow statement you can estimate after how much time your medical practice will break even. Also you should be able to tell how much cash the medical practice needs to earn to become profitable.

6) OVERHEAD: The total expenses of running a medical practice. You need to earn more than the overhead to be able to make a profit  (i.e. your salary) 

I wil introduce more terms as we go deeper into the topic in the later posts.

Authors Recommendation: If you plan to open a medical practice or any other business you need to attend the classes offerred by the organization SCORE. These are retired executive volunteers who offer free advice to young entreprenuers regarding business. I got my first lesson on cash flow (the most important one!) at one of the classes of SCORE. And don’t take the advice lightly as some of these volunteers have run mega million dollar industries before. I think I should do what I always wanted to do that is write it here ‘THANK YOU SCORE ‘

One thing I will recommend is reading the book “Personal Finance for dummies" at least two times. It is a well written book about personal finance in a simple language. You will be surprised how it will change your outlook forever.

Financial responsibility is a habit and it has to be developed. Saving is difficult in the beginning but, as you see your money grow in your saving account, it can become very addictive.

So let me give you few recommendations on what you can do. However you need to do more research to find out if it suits your situation. I am not a finance specialist, I am just a doctor:

Learning to manage your finance is a process. You don’t have to be an expert in the beginning but you need to start it right away.