Business Budget Tips For A Micro-PC: Revenue
After Your Business Plan
After completing your business plan, it’s time to jump into your micro-PC budget.
The best way to create a budget that works for your company is to use a template from Apple Numbers, Microsoft Excel, or Google Sheets spreadsheet as it allows you to easily input data and manipulate the information.
There are two significant elements in a business budget, the first is your revenue and the other is expenses.
This post will concentrate on the revenue component of your budget, and the next post will break down expenses.
Revenue
The revenue in your micro-PC will be primarily generated from your professional services, although if you are within a private practice or direct primary/direct care model you might also generate revenue from real estate, ancillary services, labs, or pharmaceuticals.
Real Estate
Before I fully jump into the micro-PC revenue conversation I want to share a word about medical real estate ownership.
I love real estate ownership as a powerful passive income channel for you as a medical doctor. I believe it will be your least risky and most satisfying real estate holding since it is connected to where you are providing medical services on a regular basis.
Obviously, this would not apply to locums, or in professional services agreements where your services are buried within a hospital-owned real estate, such as a hospitalist or an ER doctor.
Medical office building ownership is a whole separate subject that interconnects with your micro-PC but is not an entity that would be owned by your micro-PC. Your micro-PC is reserved primarily for your professional services or medical expertise (knowledge and skill).
For a number of business and asset protection reasons, I would suggest holding a medical office building in a separate business entity, like an LLC.
The common thread to both your micro-PC and a medical office building is your professional services. Your micro-PC represents the who of your professional services, and the real estate represents one of the where’s of your professional services. Since your micro-PC is virtual, it makes you extremely portable, so you don’t want it tied to an exclusive location like a piece of land. As time goes on and your professional interests evolve, you may want to eventually separate where you use your professional services/skills from the real estate you own. Keeping them separated makes this much easier to do.
From a business perspective, I believe it is wise for you to make money from both the who and the where of your professional services.
Old-style private practices & partnerships are very familiar with leveraging their medical office building ownership into the bottom line financial benefit for its members. Leasing space from commercial real estate groups is usually not cost-effective, nor wise for these small business entities.
Overall, I am a big fan of commercial real estate ownership in connection to your medical services.
Someone is going to make money on your clinical services space and it may as well be you!
My Medical Office Building
For instance, I have a separate LLC that owns the medical office building where I practice. I lease the space to my hospital employer’s real estate group. Thus on top of the revenue created by my PC-employment lite contract, I also have real estate revenue created by the location of my medical work. When I retire in 18 months, I will continue to lease the building long-term to the hospital, since 4 other employed doctors will still use the clinical space. This turns out to be a nice passive income source for my retirement plan!
All of the dollars from my micro-PC and my real estate LLC flow into my enterprise structure, as this diagram illustrates. The budgets, revenues, & expenses for each legal entity are separate from the others.
I consider this enterprise model through PC-employment lite to be the best and most progressive version of private practice. It is the model that I believe would help a lot of modern physicians to thrive during the era of the corporatization of medicine.
Even if you are currently in private practice, or plan to join one, please know that you can still form a micro-PC and use it in this business structure. For those of you who need to visually see it, here is what it would look like:
Professional Services
Now back to the topic of revenue generated by your professional services.
In terms of the value of your professional services, you are fortunate to be in a high-income profession. The system still monetarily values your work. Most of you know how much you expect to earn based on your prior year’s performance, or the metrics that are built into your current contract.
The MGMA sets national standards on physician compensation and you can access their data directly (expensive), or you can access it for $199 through Resolve. I suggest the latter as it is cheaper. You can also get an idea of the current market conditions for free from Fromme Financials or Resolve. Employers are monitored by the government to make sure they are not giving you more than fair market value compensation (but there is an acceptable range and their goal is to pay you on the lower end). Thus you can rarely ask for more than fair market value. However, there is some geographic arbitrage involved in this.
Whether you are on a salary or compensation formula, mostly this is tracked by a CMS-dictated national standard for valuing your work, called a wRVU. This places a standardized value on your face-to-face patient care.
As you probably know, employers make money off of you through your direct clinical care, but also make money on your downstream revenue, and your mineable data in the EHR. In regard to the latter, the EHR is a health record, but its most important function is as a corporate cash register. Sad to say, you are stocking your employer’s EHR all day long with dollar-earning data, and then you become the checkout clerk as you close out your note. It’s just like you are working at a healthcare Wal-Mart! No kidding, it’s really sad and exhausting.
Bonuses
Most contracts will also offer financial incentives for quality metrics and productivity bonuses. Although I like these opportunities, one must be careful not to let them behaviorally motivate you to work too hard, or too many hours. Even worse, I don’t want it to motivate you not to use all of your PTO time. This is a huge self-care mistake, and I see too many physicians do this.
In my micro-PC, I know that each week I am away from work, it costs me about $15,000 in earnings. However, I know that for my well-being it is critical for me to step away from work for 4-6 weeks each year. Although it does cost me some money, it is worth every bit because it makes my job more sustainable and fills my energy tank with the people, places, and experiences that I value. So in my annual business budget, I account for this time off.
One tip you might consider to reduce performance pressures for your business is to set your business budget at 10-15% less than you really know you will earn. If your micro-PC ends up with more profits than the budget, you can always distribute it to yourself at the end of the year.
Make sure to consult with your accounting or tax professional about how to best manage those distributions.
Side Jobs
If you have any side jobs, you will want to flow those through your micro-PC as well. For years I did a lot of these side jobs for free as a good corporate citizen. My business consultants helped to eventually see that it was a mistake to do these jobs without compensation to my micro-PC.
Side jobs are not uncommonly ‘wrapped around” your base compensation for employed doctors and can include:
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Clinical co-management
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Shared cost savings initiatives
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Administrative duties
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Non-physician provider supervisory duties
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Teaching functions
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Research
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Medical directorships
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Call responsibilities
Of course, there are also many side jobs you can pursue outside of your employer’s space, including medical directors of nursing homes, hospices, home health, and group homes. The ways that you can use your medical knowledge, expertise, and professional skills are innumerable in today’s gig economy. Again make sure to flow these through your micro-PC in order to take advantage of its tax advantages.
Micro-Business 101
One of the things that you have to understand as a micro-business owner is that the revenue that your business brings in will not all land in your pocket. You will have to account for your business expenses and the net is what you get to keep.
Your wages will make up the largest part of your business expenses, as will your business overhead, fringe benefits, and business distributions. We’ll dive more deeply into this in my next blog post on expenses.
Overhead
One of the advantages of a micro-PC is the low overhead associated with the business. This is especially true if you use it via an employment lite contract or in locums. In these arrangements, all of the practice management, staffing, clinic space, and equipment are covered by the large corporation that is contracting you for your services.
Here is what that looks like.
This is one of the reasons that I love the employment lite structure. The overhead is low and you are empowered to autonomously run your medical business. It turns out your professional autonomy is a fundamental element that will help you combat burnout. It’s the loss of this professional autonomy for traditional employees that significantly increases your risk for burnout.
If you use your micro-PC within a private practice arrangement or indirect care like direct primary care you will have to take into account more overhead including practice management, staffing, management, and real estate considerations.
Revenue Does Not All Land In Your Household
As a small business owner, it is critical for you to understand that your earnings through your micro-PC do not all land in your household.
When I was a traditional employee, my take-home pay was around $15,500 per month, My employer paid my taxes for me, jointly provided my generic benefit plan, and provided an avenue retirement plan. The direct deposit to my bank account every month made me feel rich because of this large sum of money.
After converting to a micro-PC with an employment lite agreement, my 1099 monthly revenue into my micro-PC (my earnings) was now $50,000-$70,000 per month. Now I felt crazy rich, but the reality was that I had to use this money to pay for all of my business expenses that included my wages.
Secret Sauce
The power of small businesses is to use all of the advantages of this structure to help your household retain as much of your micro-PC’s earnings as possible.
The secret sauce is the tax advantages that are offered by the US Tax code that favors small businesses over individuals.
In the end, you can use this business structure to retain about 10-15% of your earnings versus a traditional W-2 employed physician. (see case study below)
The first step to saving taxes is to pay yourself a reasonable self-employed W-2 salary. The key idea here is the less you pay yourself, the smaller will be your tax burden. This is a critical concept that many small business people understand. Don’t make the rookie mistake of dramatically lowering your physician salary here, as the IRS knows your earnings history as well as the national norms for a doctor’s income. You will be headed for an audit if you overdo this element. Work with your accounting or tax professional to help you set a reasonable salary. A 60/40 split between salary and corporate distributions is considered a safe standard to follow.
It’s not that your business earnings won’t eventually land in your household, you just have to wisely construct your small business in a way that the cash from your earnings gets into your home in ways that extend beyond your paycheck. Your wages will no doubt still be the largest component of your household dollars, but you will also get money into your household through 3 other channels from your micro-PC.
The end result of your micro-PC structure will be earnings landing in your household than had you had simply received all of it via your W-2 paycheck. Your micro-PC will lead to a lower effective tax rate, a growing net worth, and the same lifestyle that you are used to.
I remember the first time I set down with my business coaches and contemplated making the conversion to a PC-employment lite structure. I noted my micro-PC W-2 paycheck was going to be significantly less in dollar amount (even with the addition of my spouse now being on payroll) and this made me nervous. I was used to my wages being the sole source of dollars for my living expenses and savings. As the graphic above demonstrates, in a micro-PC, there are multiple sources of dollars that flow into your home.
Here is what my real case study comparison between traditional employment and employment lite looked like for me. I wanted to see the difference before I committed to it.
Note the difference in the “net paycheck” for each side and it’s far less for the micro-PC.
But also make note of the total net benefit to the household with both options. The retained household income in the Micro-PC was significantly higher and worth nearly ¾ of a million dollars over 10 years!
Individualized Benefits
When you own a micro-PC, there are multiple business expenses and fringe benefit plans that can be built uniquely around your household in such a way that they benefit you far greater than as a traditionally employed doctor.
Those individualized fringe benefit plans are all part of the creative power that you have to make sure as much of your corporate revenue eventually truly benefits your household. You don’t have to share it with anyone else, and you can certainly feel good about sharing less of it with the government (taxes). With the average physician paying $89,000 in taxes annually, you are among the top 10% of taxpayers. Any strategy you can take to reduce the tax burden of your earnings is a wise move.
I micro-PC places you in a great position to do this, because of the way it places you back in control of your earned dollars. When you are put in control of the flow of your earnings, now you have the power to retain more of it for your home.
More on that as we dig into business budget expenses in the next post
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