Spend to Succeed: Mastering Big Investments in Your Medical Practice

Episode 106: Spend to Succeed: Mastering Big Investments in Your Medical Practice

Welcome to the Medical Money Matters Podcast, where we tackle the financial challenges of running a successful medical practice. Today’s topic is one I know will resonate with many of you: the paradox of needing to spend money to make money. It’s a concept that’s often discussed in the business world, but it can feel especially challenging in the context of a medical practice. Why? Because for most physicians, business training wasn’t a part of the curriculum in medical school. And yet, we’re expected to make significant financial decisions that could affect not only the practice’s bottom line but also patient care and team morale.

So, how do you navigate this? How do you decide when to spend, how much to spend, and whether an investment is truly worth it? Today, we’ll break that down. We’ll explore some critical financial tools, such as break-even analysis and ROI calculations, discuss the costs of capital, and walk through a real-world case study of an OB/GYN group making a big purchase decision. By the end of this episode, I hope you’ll feel more confident about approaching these decisions in your own practice.

Let’s start with this idea that you need to spend money to make money. On its face, it might sound counterintuitive. After all, isn’t the goal to save money? Well, in a medical practice, staying competitive often requires investment. Whether it’s purchasing state-of-the-art equipment, expanding your team, or adding a new service line, these decisions can drive growth and improve patient outcomes.

But there’s a catch. Many physicians and administrators feel stuck because they fear making the wrong decision. What if the investment doesn’t pay off? What if it puts the practice in financial jeopardy? These are valid concerns, especially when you consider the lack of formal business training most clinicians receive. As a result, decisions about large purchases or new initiatives can feel overwhelming.

This is where financial tools come in. Two of the most valuable ones are break-even analysis and return on investment, or ROI, calculations. These aren’t just numbers—they’re a way of thinking that can bring clarity and confidence to the decision-making process. We first reviewed these in episode 49, and today’s episode goes through a case study as well.

Let’s start with break-even analysis. The concept is simple: it’s the point at which your revenue from a new investment equals its costs. Imagine you’re considering a new service line, like offering ultrasound imaging in your office. You’d need to account for the cost of the equipment, the salaries for additional staff, and other expenses. Then, you’d estimate the volume of patients or procedures needed to cover those costs. Once you hit that point, every additional patient represents profit. It’s good to know how long that will take prior to making a large purchasing decision. In general, anything with a break-even inside of a year is an easy decision. If it takes longer than that, it’s time to sharpen the pencil. This will depend on your current reserves and your risk tolerance.

Now, let’s talk about ROI. This measures the profitability of an investment relative to its cost. The formula is straightforward: you subtract the cost of the investment from the net profit it generates, then divide that number by the investment cost. For example, if you invest $100,000 in a new diagnostic machine and it generates $200,000 in profit over time, your ROI is 100%. ROI can help you compare options to see which one offers the best financial return given the same time period.

These tools are essential because they give you a data-driven way to approach decisions. Instead of relying on gut feelings or assumptions, you can quantify the potential risks and rewards. This clarity can make even the most daunting decisions more manageable.

Another critical piece of the puzzle is understanding the costs of capital. In simple terms, the cost of capital is what it takes to finance your investment. How much does the money cost? That’s a funny question to ask, but a good one! This might include the interest rates on loans, the terms of a capital lease, or the opportunity cost of using your cash reserves.

Let’s say you’re weighing whether to purchase equipment outright or lease it. Purchasing might seem like the obvious choice if you have the cash on hand, but what’s the opportunity cost? Could that money be better used elsewhere in the practice, like hiring a new provider or upgrading technology? On the flip side, leasing spreads the cost over time, which could help preserve cash flow but might come with higher overall costs due to interest or fees.

This brings us to a real-world example that ties everything together: the case of an OB/GYN group deciding whether to purchase a mammography machine.

This group was looking to expand its services by adding in-office mammography. They knew it would be a significant upfront cost, but they also believed it could improve patient care and generate a new revenue stream.

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The first step was conducting a break-even analysis. They calculated the total fixed costs, including the price of the machine, installation, and training, as well as ongoing variable costs like technician salaries and maintenance, along with the additional space it would use. Then, they estimated the number of mammograms they’d need to perform each month to cover these costs. By understanding their break-even point, they could set realistic targets and assess whether the investment was viable.

Next, they evaluated the ROI. They projected revenue from mammography services, taking into account insurance reimbursements and patient demand. They also considered indirect benefits, like the convenience of offering an additional service in-house, which could strengthen patient loyalty and attract new patients to the practice.

Finally, they analyzed their financing options. Purchasing the machine outright would require a significant cash outlay, while a capital lease would spread the cost over several years. They weighed the cost of borrowing against the potential impact on cash flow and decided on a lease, which allowed them to preserve funds for other priorities.

The result? The group made a compelling business case for the purchase. Within a year, they not only hit their break-even point but also saw a meaningful boost to their overall revenue. Perhaps most importantly, they were able to provide a valuable service that improved patient care, satisfaction, and outcomes. A true win-win-win.

So, what are the key takeaways from this story? First, combining clinical goals with financial strategy is crucial. You’re not just running a business—you’re delivering care. But to sustain and grow that care, you need to think strategically about your investments.

Second, tools like break-even analysis and ROI calculations are your best friends. They bring objectivity to decisions that might otherwise feel uncertain. And finally, understanding the costs of capital helps you evaluate your financing options and choose the one that aligns with your practice’s goals.

Remember, you don’t have to navigate these decisions alone. There are experts and resources available to help you make informed choices. Business skills are learnable, and with the right support, you can approach even the most complex financial decisions with confidence.

Thanks for joining me today on the Medical Money Matters Podcast. I hope you found this discussion helpful and that it sparks some ideas for your own practice. If you’re interested in learning more or need guidance on a specific challenge, feel free to reach out to us at Health e Practices at www.healtheps.com. And don’t forget to follow or subscribe so you never miss an episode.

Please join me for our next episode, where we’ll explore another facet of medical practice business and finance.