Even though you are a Nurse Practitioner in your own practice, you didn’t go into healthcare because you love spreadsheets, financial statements, or business jargon.
You got into healthcare to help people, to make a difference.
But once you operate your own practice, you quickly learn that business jargon and finances are no longer optional. They are a part of your day as much as the clinical work you do.
And slowly, they begin to impact every decision you make… from developing fee schedules to hiring, from billing to marketing, and everything in between.
That’s why developing a working vocabulary of the most commonly used business terms and concepts is essential to your success as a business owner.
Not only will it help you gain a deeper understanding of your practice’s financial data, but it will also make it easier to communicate with your accountant, biller, and bookkeeper.
And here is the good news…
You don’t need to go back to school to get a business degree; just getting up to speed on basic business concepts and jargon will do the trick.
This article introduces the most important concepts and terms every NP practice owner should understand and why.
The Language of Business May Feel Intimidating…
Every field has its own language; business is no exception.
And that’s why for many NPs, “business talk” feels overwhelming and intimidating… a completely normal response to something you’re not familiar with and don’t understand.
While most Nurse Practitioner programs focus on clinical education, few include business education.
As a result, some NPs avoid their numbers. It’s not because they’re incapable, it’s because the concepts and language feel foreign.
But understanding just a handful of core terms changes everything. Once the words make sense, the numbers stop feeling scary.
The Financial Terms That Matter Most
1. Assets, Liabilities, Equity
Assets are anything a business owns, such as property, equipment, cash, inventory, and investments.
Liabilities are anything a business owes, such as loans, equipment leases, or other bills.
Equity is the owner’s share in the company after liabilities are paid.
2. Break-Even Point
This concept is particularly important for new practice owners or those who want to expand their business.
The break-even point is where your practice can pay for itself and cover all expenses, but hasn’t yet made a profit.
Important
Knowing your break-even point, particularly if you’re starting, is essential. It helps you:
- Find appropriate space and equipment
- Set realistic fee schedules and timelines
- Create appropriate product and service offerings
- Make smarter hiring decisions
- Reduce anxiety around reaching profitability
If you don’t know your break-even point, it’s like working in the dark or having blinders on.
3. Revenue
If you’re thinking, “This needs no explanation,” let me explain…
But first, here’s a definition.
Revenue (also referred to as total sales or gross revenue) is all the money a business earns over a given period from selling its products and services before any expenses or taxes are paid.
Revenue is also referred to as “top line” income, because it’s the first item listed on the income statement of a business, before anything is subtracted.
And here is why it needs a bit of explaining. You see, many use the term “revenue” loosely. They use ‘revenue’ when they mean ‘profit,’ and vice versa.
While not the same, the terms are used interchangeably.
For example, someone will talk about their business success without ever clarifying whether the number they quote refers to revenue or profit… two very different things.
In a healthcare practice, revenue includes all the money the practice generates over a given period: patient payments, insurance reimbursements, product sales, cash-pay services… everything that generates income for the practice.
Important
High revenue by itself is not an indication of profitability or a financially sound practice. A practice may generate plenty of revenue; however, if expenses are too high or reimbursements don’t come in, the practice may not be profitable.
4. Expenses
Everything your practice spends money on to operate, pay the bills, and keep the doors open.
Some examples include:
- Rent
- Utilities
- Wages
- Supplies
- Subscriptions
- Insurance
- Marketing
As you probably know, expenses fall into two broad categories. There are fixed and variable expenses.
- Fixed expenses stay the same each month. Take rent, for example. You pay the same rent regardless of how many patients you see in a month.
- Variable expenses, change and adjust based on volume or activity. Medical supplies, for example, are variable. Let’s say you offer a flu clinic and therefore need a significantly higher number of vaccines than you usually would.
Important
Expenses are subtracted from revenue to arrive at profit. So, it stands to reason to keep your costs as low as you can.
However, it’s not just about expenses.
To generate more profit in any business, you have several options. Three possibilities are:
- Increase the level of revenue
- Decrease expenses
- Aim for a combination of the two
To reduce your expenses, you can cut your variable and/or fixed costs, though fixed costs may take longer to reduce or eliminate, since there may be, as in the case of rent, a contractual obligation.
5. Profit or Net Income
At the most basic level, profit is what’s left over after all expenses are paid.
But don’t be fooled, a practice can be busy every day of the week and still not be profitable… when expenses eat up revenue, and nothing is left over.
Important
The basic equation of Revenue – Expenses = Profit is correct; however, profit is a bit more nuanced on closer inspection…
How profit is defined and taxed in a business depends to a large extent on the legal structure. It’s the legal business structure that determines how profits are assessed and taxed.
Profits are treated differently for pass-through entities compared to C-Corporations and S-Corporations. And of course, profits are treated differently in Non-Profit vs. For-Profit organizations.
Since your choice of business structure dictates how you and your business are taxed and treated under the law, it’s a decision best made with a qualified advisor to ensure the best fit for your specific situation.
6. Cash Flow
Essentially, cash flow measures the movement of money into the business (from sales, investments, etc.) and out of the business (to pay expenses, purchase new equipment, etc.) over a period of time.
Cash flow may be divided into various categories; however, if more money is coming in than going out, the company’s cash flow is positive.
Important
Positive cash flow differs from profit. A business may be profitable on paper, but have a negative cash flow, meaning it cannot pay its bills.
Cash flow is what pays the bills!
A practice may be profitable on paper, but struggle to pay bills if cash isn’t arriving when expenses are due.
This could happen if the practice has problems with insurance reimbursements, slow customer payments, defaults, or a significant upfront investment in vaccines or equipment.
Cash flow problems are one of the top stressors for most businesses, including healthcare practice owners.
7. Accounts Receivable (A/R)
Essentially, accounts receivable refers to money you’ve earned but haven’t been paid yet.
In healthcare, funds tied up in AR are usually due to slow insurance reimbursements, patients not paying their share of the bill, or patients just dragging their feet on payment.
Important
Large A/R balances can get you into trouble. They can create cash flow problems even when revenue looks strong.
The longer balances remain in A/R, the more difficult they may be to collect. Keep a close eye on your cash flow… it is the lifeblood of your business!
Developing a Level of Comfort with these Terms Matters
Understanding financial language and concepts allows you to:
- Ask better questions
- Make more informed decisions
- Spot problems early and correct them
- Communicate better with accountants, bookkeepers, and advisors
But perhaps most importantly, it helps you build more confidence in handling practice finances.
Greater confidence allows you to be proactive rather than reactive.
Developing a certain level of financial fluency doesn’t mean becoming obsessed with numbers. However, it does mean you are well-informed enough to protect yourself, your practice, and your future.
In Conclusion…
Your clinical skills are the foundation for your practice; however, developing financial understanding and fluency is what keeps that foundation standing.
Keep in mind, you don’t need to learn everything at once. Start by learning the language of business, and the rest becomes much easier.
How comfortable are you with “business speak?” Let us know, leave a comment below.
By Johanna Hofmann, MBA, MAc., EAMP; regular contributor to the NPBusiness blog and author of “Smart Business Planning for Clinicians.”