Chapter 26: New-Wave R.O.I.

Return on Practice Investment Calculations

[Managerial Concepts for Physician Executives]

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact – Warren Buffet 

 By David Edward Marcinko

Introduction

Return On Investment (ROI), Residual Income (RI) and Medical Enterprise Value Added (MEVA) calculations are important managerial accounting concepts for physician executives.

These three key parameters must be high enough to warrant continued existence of the medical office, or the practice will eventually cease as capital flows to profitable business endeavors, and away from unprofitable ones.

ROI Calculations

To enhance understanding of this concept, as well as facilitate its pragmatic use, the Return on Investment (ROI) equation may be decomposed into its three individual component parts as listed below: 

  • Net Operating Income
  • Practice Revenue
  • Average Operating Assets

And mathematically stated as follows:

Net Operating Income                 Practice Revenues

__________________       X            _______________       =    Office ROI      

Practice   Revenues                 Avg. Operating Assets

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One thought on “Chapter 26: New-Wave R.O.I.

  1. R.O.I. and Practice Financial Ratio Analysis

    Many ratios, between various financial parameters on a medical practice’s financial statements, have great managerial use, but are seldom generated. Why?

    Probably because most doctors and some accountants don’t have the expertise in managerial and financial analysis that is required. A good medically focused CPA should expanded this financial ratio concept to incorporate practice statistics.

    For example, we graph these ratios out over time, in an user-friendly format, so trends–good and bad–are generally seen before they would otherwise become apparent.

    We think visual representation makes initial data interpretation easier for both the schooled doctor and novice laymen. These graphs are but one component in any performance dashboard that should be built for a medical practice.

    And, the IRS uses benchmarking and financial ratios to red flag tax returns! So, beware!

    Dr. Gary L. Bode; CPA, MSA, CMP

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