Cheapest option may not be least expensive

August 25, 2011

Every physician faces choices. Although the right choice for your practice may appear at first to be the least expensive option, in far too many cases, the option that starts out as the least expensive ends up costing you more either immediately, in the long run, or both.

Choosing the option that best serves your practice first requires knowing what your practice needs, what it costs, what it could cost, and the cost of all other options. To illustrate, consider that most basic figure on every practice's balance sheet: financing.

Affordable financing options are rapidly dwindling. One result has been that more physicians are using their own money to finance the operation of their practice. Lending your own money to the practice may provide much-needed funding, but it comes with a cost, often called a "lost opportunity" cost. It is the amount those funds would have earned for you had they remained in savings or been invested. Today's low interest rates earned on savings might substantially reduce that lost opportunity cost, but it remains a factor to consider.

When evaluating the options available, be wary of incentives, such as free rent or tax breaks, because these incentives may be masking problems, and you or your practice manager need to find out whether that's the case before signing on.

In other cases, incentives may cost you money in the long run. For example, suppliers frequently offer discounts for prompt payment or volume purchases of medical supplies. If the credit terms offered are "1/10, net/30," it means you receive a 1% discount if you pay in 10 days, or pay the full amount if wait the standard 30 days.

Is that a good deal? It depends. You need to ask how much you could have earned on the funds used to make the early payment and compare it with the discount you received.

In general, the more you purchase from a supplier, the more likely it is to offer discounts so that you don't use a different supplier. Remember, however, that you might be sacrificing quality by purchasing goods from a lower-priced supplier.

MAKE THE MOST OF TAX DEDUCTIONS

Taxes may be one of life's certainties, but that doesn't mean you have no options for reducing them. You can choose to deduct some expenses immediately or take smaller, periodic write-offs in the current year and subsequent years.

Not using the Section 179 first-year expensing allowance can make sense in a year when profits are down. Waiting to take the deduction until a year when profits, and taxes, are higher can save more money in the long run.