Practice Finance Management: The Power of Compounding

Small improvements can lead to large benefits over time. Learn how targeted optimizations can support your healthcare finance management.

Entrepreneurial Physician

One of the quotes often attributed to Albert Einstein about compound interest is as follows:

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

This quote underscores the immense power of compound interest in growing wealth over time. The same principle applies to practice finance management. Understanding and leveraging compound interest can lead to substantial financial growth, while failing to grasp its significance can result in financial disadvantages—particularly while independent practices face snowballing revenue obstacles, forcing a recent drop in privately owned establishments.

Understanding How Compounding Relates to Billing Best Practices

The power of compounding affects practices in two essential ways:

Left unattended, small inefficiencies and friction points in your operation compound over the course of many years. Think of these obstacles as opportunity costs to your practice. Had you removed them early in your career, you wouldn’t have to suffer through them over the course of many years of seeing patients.
Efficiencies and enablements similarly compound over the course of a career or the life of a practice. Think of these efficiencies as opportunities to scale your practice.

If you see 30 patients a day, four days a week, 46 weeks of the year over 30 years, this equates to 165,600 patient visits. What is the value of 5% more efficiency in time or revenue?

This concept is why performance improvement focused on achievable and measurable goals is a critical component when it comes to how to run a practice efficiently. The compounding effect of incremental advancements isn’t immediate, but it builds steadily as each small investment enhances your practice’s capabilities—creating a ripple effect that leads to long-term financial stability and growth.

By understanding and leveraging compounding, you can create a self-sustaining cycle of improvement, where each investment strengthens your practice and paves the way for future success.

The Story of the Wheat and the Chessboard is a powerful parable that can shed light on the power of compounding.

The Story of the Wheat and the Chessboard

Once upon a time in ancient India, a wise man invented the game of chess and presented it to his king. The king was so captivated by the game’s complexity and elegance that he offered the inventor any reward he wished.

The wise man made a seemingly simple request: one grain of wheat for the first square of the chessboard, two grains for the second, four grains for the third, and to keep doubling the amount for each of the 64 squares.

The king, thinking this was a modest ask, gladly agreed. But as his treasurers began calculating, it soon became clear that the wise man’s request was anything but simple. The amount of wheat required was beyond anything the kingdom could supply.

The Calculation

The number of grains of wheat required for each square follows an exponential pattern. Specifically, the number of grains on the \( n \)-th square is \( 2^{n-1} \).

For the 1st square: \( 2^0 = 1 \) grain
For the 2nd square: \( 2^1 = 2 \) grains
For the 3rd square: \( 2^2 = 4 \) grains
For the 4th square: \( 2^3 = 8 \) grains
And so on…

To find the total amount of wheat required, you sum up the grains on all 64 squares. The sum of the series \( 1 + 2 + 4 + 8 + … + 2^{63} \) is equal to \( 2^{64} – 1 \).

The Result

The total amount of wheat is \( 2^{64} – 1 \) grains. This is a colossal number of approximately \( 18,446,744,073,709,551,615 \) grains of wheat.

To put this into perspective:

If one grain of wheat weighs about 1/7,000 of a pound, the total weight of the wheat would be around 263 billion tons.
This amount of wheat far exceeds the global production of wheat, which is about 750 million tons annually as of recent years.

The Power of Compounding at Your Practice

The story demonstrates the power of exponential growth and compounding. What starts as a small and seemingly insignificant improvement grows exponentially to an unimaginably large quantity in a relatively short number of steps. This principle is crucial in various fields, including finance, population growth, technology—and, especially, when operating a practice.

In practice finance management, the concept of compounding can turn small, regular investments into substantial sums over time. From a revenue perspective, reinvesting profits back into the practice—whether through new equipment, hiring, or expanding services—can generate compounded growth. Each new investment not only boosts current revenue, but it also opens the door to further opportunities for financial gain—creating a cycle of growth. This approach can lead to fiscal sustainability for your practice, enabling you to withstand industry changes, economic shifts, or unforeseen circumstances—such as an unexpected downturn in patient volume.

So, should you focus on small elements of performance improvement? Should you remove inefficiencies and amplify efficiencies within your practice?

You be the judge.

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Dr. Lawrence Gordon, MD

He is a practicing Otolaryngologist and the founder of ENT Specialty Care located in Goshen, NY. He is also the CEO and Founder of WRS Health. The software is an all-in-one platform, designed by physicians, providing clinician-centered workflow solutions to continually improve and grow your practice.