Enhancing Your Practice's Revenue - California Orthopaedic ...

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Appendix:Ten Top TipsBy Steven E. Fisher, MBAThe preceding chapters outline twelve different strategiesfor generating additional income. This appendix containsgeneral information relating to the strategies. Some of thetips will help you make good decisions regarding which ofthem might make sense for you to pursue. Others provideguidance that will ensure that the ventures you ultimatelydo pursue are financially and operationally successful.1. Financial Statements and BudgetsMany authors made reference to financial statements and/or budgets. It is of crucial importance for the owner(s)of any business to understand how their business isperforming from a financial standpoint. This involves,at a minimum, learning about the three major financialstatements: the Profit and Loss (P&L), the BalanceSheet, and the Statement of Sources and Uses of Cash. Inaddition, owners need to understand what is involved indeveloping capital and operating budgets every year andcomparing actual results against budgets. This is a toolthat allows business owners and administrators to identifyproblems before they become serious. Examples of financialstatements are available on the AAOS on-line PracticeManagement Center. For more information, see (www.aaos.org/pracman). See also # 10 below.2. Formulas for Calculating Investment ReturnThere are many formulas for calculating returns butfollowing are three in common use:• Net Present Value (NPV) is the difference between theamount of the up-front investment required to starta business venture and the discounted value of thefuture cash flows. The NPV will vary depending on thediscount percentage used, and different practices will usedifferent percentages.• Return on Investment (ROI) measures the efficiency ofan investment. It is a ratio whose numerator is “Gainfrom Investment minus Cost of Investment” and whosedenominator is “Cost of Investment.” It does not takeinto account the time value of money.• Payback is the length of time that it takes for a projectto recoup its initial cost out of the cash receipts that itgenerates. The premise of the payback method is that themore quickly the cost of an investment can be recovered,the more desirable is the investment. Like ROI, it doesnot take into account any discount rate.Many financial analysts argue that NPV is the mostsophisticated measure of the three described above.However, investors’ access to capital is limited; thereforeit is likely that they will be obligated to choose betweenalternative investments vehicles even if all of them havepositive discounted cash flows. Investors in any businessneed to discuss alternative formulas for calculatinginvestment return and come to closure regarding whichformula they will utilize.3. Governance vs. ManagementGovernance and management are not identical andconfusing the two will can result in operational problems.Governance is something that the owners of a businessventure must do. Among other things it involves (a)making strategic decisions regarding the mission andgoals of the enterprise; (b) executing agreements thatallow the business to commence operation and remain inbusiness; and (c) formulating short and long term plans.Management by contrast involves oversight of day-to-dayoperations. Day-to-day operations include finance andaccounting, human resources management, oversight ofclinical operations, regulatory compliance, informationtechnology, and marketing. In some cases, one of thedoctors may function as the senior manager; in most cases,however, it is wise to recruit and employ someone who hasbusiness-related education and experience. See #4 below.4. Critical Need to EmployHigh-quality ManagementHistorically, it was often true in solo offices that the spouseof the orthopaedist functioned as the office manager. Thesedays, however, it takes a great deal of knowledge and skillto run even a small practice. To the extent that physiciansdecide to embark on any of the activities described inthe Primer, they should seriously consider recruiting andemploying a professional manager, someone who hasknowledge and skills in areas such as (a) negotiating withpayors; (b) hiring, training, evaluating and terminatingstaff; and (c) developing policies and procedures to ensurepractice compliance with government regulations such asStark, Anti-kickback and HIPAA.5. Lease vs. Buy AnalysesIf an orthopaedic practice plans to pursue many of theincome generation strategies outlined in the Primer, itwill be necessary to acquire equipment. The questionarises as to whether leasing or buying is the better option.The decision is not always an easy one to make becausethe two acquisition options both have advantages anddisadvantages. For example, leasing generally requiresminimal down payment (or none); it may protect thepractice against obsolescence; and payment may be spreadover a longer period of time. Purchasing may provide taxadvantages, and the monthly costs may be lower but it44© 2011 American Academy of <strong>Orthopaedic</strong> Surgeons
may restrict the practice’s financial operations. Makingthe correct lease vs. buy decision may be key to a businessventure’s long-term success. Once a decision has been madein this regard, investors need to review the terms of thelease or purchase in detail to be sure they understand thefinancial and operational consequences. See # 8 below.6. Human Resources ManagementHuman resources (HR) is something that operates “behindthe scenes” and physicians may not think much about.Establishing a full-fledged HR function at the outset,however, is critical to the success of any new or existingbusiness. This includes (a) employment (recruitment,selection and retention); (b) compensation and payroll,(c) benefits (medical, dental, life and disability insurance,pension, vacation); (d) training and development; (e)performance management; (f) policies and procedures(including clinical policies and procedures); (g) anemployee manual; and (h) legal compliance and federalreporting.7. Don’t Rob Peter to Pay . . . PeterReference to this was made by several chapter authors butit bears repeating. When a group of potential investorsassesses the profitability of a business venture, they mustconsider what the impact of that venture may be onexisting operations. For example, if a practice wants toopen another office, it will be necessary to develop a proforma that sets forth anticipated revenue and costs. It islikely however, that some patients that otherwise wouldhave gone to the first office will no longer do so, so thismust be taken into account. By the same token, it mayalso be the case that economies of scale may limit certainexpense increases.8. Seek Counsel from Appropriate OutsideAdvisors at the Appropriate TimeNot infrequently, potential investors in a business areloath to seek counsel from outside experts because thiscan increase the initial cost of the investment. They maysimply do some reading on a subject such as Stark, HIPAAor Anti-kickback or ask for information from a sourcewho will give them feedback at no charge. This is never agood idea. Anyone who desires to grow his or her currentbusiness, or create a new one, must consult appropriateadvisors – recognizing that not all advisors can provide allkinds of advice. For example, an accountant may be ableto assist with calculating profits and losses of an existingbusiness but may not wish to involve him or herself inprojecting a future investment return (see # 2 above). Anattorney may know all about the law but may or may notfeel equipped to weigh in on whether the business modelmakes sense. Investors must decide which advisors theyneed as part of their initial plan. See # 9 below.9. Planning the PlanOne or two Primer authors made reference to the valueof the concept of project planning. Planning is perhapsthe key element in the success of any enterprise (all “todo’s” identified, responsibilities assigned, and deadlinesestablished). The more detailed the plan, the greater thelikelihood of success. Planning, however, is a tedious,detail-oriented process that many people want to dispensewith or think about only in broad terms. Orthopaediststend to be “take charge doers” but many have limitedpatience with the seemingly-never-ending meetings, emailexchanges, negotiations and compromises that are requiredto develop any comprehensive plan. They must learn a newset of skills if they are to contribute meaningfully to theplan’s development. [Note: one element of every successfulplan involves planning for the unexpected. While it is neverpossible to account for everything, it’s useful to think atleast about the “known unknowns” even if it is not possibleto take into account the “unknown unknowns.”]10. AAOS Practice Management ResourcesFinally, Academy members who are considering embarkingon any new business venture are well-advised to look to theAAOS to determine if information is available regardingthat venture. The AAOS Practice Management Group, inconjunction with the Practice Management Committeehas a wide array of resources to help Fellows improve theirpractices’ efficiency and effectiveness. For example:• The on-line Practice Management Center (www.aaos.org/pracman) contains hundreds of articles, white papersand spreadsheets on a wide array subjects including optionsfor practice growth.• Every year, AAOS sponsors two educational courses:a one day course at the Annual Meeting and a 2.5 daycourse in the fall.In addition to the on-line Practice Management Centerand courses, Practice Management Group staff offeradvice and counsel over the phone and via the Internet.This advice and counsel is provided free of charge as amembership benefit. AAOS is one of the few nationalmedical specialty societies that employ former orthopaedicpractice managers and practice management consultants inits practice management area. These individuals have notonly “talked the talk;” they have “walked the walk,” andmembers should avail themselves of their expertise.Contact: Steven Fisher, MBA: sfisher@aaos.org© 2011 American Academy of <strong>Orthopaedic</strong> Surgeons45
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