Managing Practice Finances
Practicing doctors of optometry will also assume business management responsibilities. A basic understanding of financial management is essential to your success. The AOA is here to help.
Financial management as a practicing doctor of optometry
Particularly in private practice, you may take on the role of chief financial officer. Your responsibilities could include arranging for capital, maintaining adequate sources for current and future borrowing, maintaining and developing banking arrangements, handling the monies from your practice and your investments and managing real estate transactions. Below are some things to keep in mind.
Securing a loan, cash management and more
Securing a loan—If you start or buy a practice, you’ll probably need money from outside financing. Consider the time period, the reason for the loan, the cost and the source. Possible lenders include banks, the Small Business Administration, credit unions, a relative, suppliers who have dealt with the practice, finance companies and the Small Business Investment Company and a venture capital firm, especially for small businesses.
Preparing a loan proposal—You’ll need to create an extensive proposal, called a business plan, which should include the following elements:
- The practice: For an existing practice give brief details of when it was established, the location, its development and growth and its structure.
- Management: List the age, experience and qualifications of each of the doctors and administrative staff members.
- The market: Describe your services, product, patient base and competitors.
- Financial performance: For an existing practice, include one to three years of accounts and current figures for debtors, creditors, inventory, bank balance, leases and other loans.
- Projections: State the objective of your practice, long-term goals, cash-flow projection and budget. · Amount of money required: State the amount and type of finance required and when it will be needed. For an existing practice, relate this figure to the amount of net worth in the practice. Be sure to include a margin for unforeseen circumstances.
- Repayment: Show how projected profits indicate the feasibility of your repayment plans. State when you will be able to start repayment.
- Security: Detail the assets you have that are available as collateral.
Areas to monitor—When in practice, the areas of practice finances you’ll need to monitor most carefully are fees, billing, collections, appointments and scheduling, income from practice, salaries, overhead and equipment costs. A key tool to help you understand these areas is a monthly summary report.
Financial ratios—To understand practice finances, you’ll need to become familiar with key financial ratios, including:
- Current ratio: Current assets divided by current liabilities. Indicates your ability to repay debt and the margin of working capital.
- Debt to equity: Debt divided by owner/shareholder equity. Shows if your practice has an acceptable amount of debt or too much debt.
- Return on capital: Net profit divided by total capital employed. Shows how efficiently your practice uses its capital investment.
- The acid test: Cash, marketable securities and receivables divided by current liabilities. Since it eliminates inventory and considers only liquid assets, this is a more severe test of your ability to repay debt.
Controlling costs—Among these are fixed costs and variable costs. Fixed costs are overhead items paid for just to keep the business running. Variable costs are those items that move up and down depending on the volume of patients.
Cash management—A cash budget or forecast is a statement of expected cash receipts and cash payments over a set period of time.
Using asset management accounts—This multi-purpose account links investing, savings, checking, credit card and some borrowing transactions. You can save time with an account in which different functions are consolidated.
Accounts payable—Paying bills early can mean lost interest to you. No additional advantage is gained by paying a supplier before the bill is due unless the vendor offers a discount for early payment.
Securing equipment lease versus purchase—The well-equipped practice needs a variety of devices, including a photocopier, telephone system and fax machine. Depending on your situation, leasing may be more economical than purchasing.
Financial advisors—Early in your career, you should begin selecting a group of professional advisors to whom you can turn for support on an as-needed basis. Be sure to request references and discuss fees when selecting a bank, insurance agents, financial planners, tax advisors, accountants, management consultants and attorneys.
Protecting your practice against embezzlement—The best way to prevent embezzlement is to make it more difficult for dishonest employees to misappropriate funds. When you join or start a practice, make sure preventive measures are in place.
Bonding employees—The purpose of bonding is to cover your losses in case an employee steals from your practice. To bond an employee, contact your insurance agent.
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