Improve the financial position of your practice

April 10, 2011

Have you considered using scientific principles to improve the financial position of your practice?

Key Points

Take the concept of leverage, for instance. In physics, a lever multiplies the speed, force, or distance exerted on another object or load. The ratio of the output to the input force is called the mechanical advantage, about which Archimedes wrote in the third century BC.

Similarly, 2,000 years later, the Principle of Moments, also known as Varignon's theorem, states that the sum of torques due to several forces applied to a single point is equal to the torque due to the sum of the forces.

LEVERAGE IN THE FINANCIAL SENSE

In finance, leverage is a general term applied to any technique used to multiply gains and losses. Such techniques include the use of a small initial investment, a credit, or borrowed funds to gain a high return in relation to your investment or to gain control of a much larger investment.

Often, leveraging means incurring a large debt by borrowing funds at a lower rate of interest and using the money in a high-risk investment to maximize returns. The high-risk investment in this case is your own medical practice, not some offshore oil futures scheme. Similarly, think of the sum of torques as the sum of the effects of multiple business strategies on your single practice's success.

A leveraged buyout is a type of business practice whereby investors or a corporation use borrowed funds or debt to finance an acquisition. Both the assets of the acquiring company and those of the acquired company may be used as a form of secured collateral.

A leveraged buyout does not involve much of the acquiring company's funds, as reflected by the high debt-to-equity ratio (the leverage of money) of the total purchase price. In addition, any interest that accrues during the buyout period will be compensated by the future profits of the acquired company.

If the acquired company's returns on investment are greater than the cost of the debt financing, then the acquiring company can benefit from the financial returns, further increasing the value of the combined companies. If the deal goes badly, however, then the leverage can work in reverse against the acquiring company, resulting in economic losses.

A good example of a failure is the recent housing market collapse; fully a quarter of homeowners now owe more money in mortgages than their home is worth. A good example of a leveraged buyout in medicine is one strong practice using a loan to buy another, weaker practice, resulting in higher income all around.