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Building a Business Plan: Part 5
Finances
This article by By Terry Flanagan, DC, DABCO, MPH, MBA first appeared in ACA News • Volume 2 • February 2006
Developing a Financial Plan
The first step in understanding your financial picture is the development of a pro forma, or hypothetical financial statements (in this case an income statement and profit/loss statement), that shows your expected performance over a future period of time. You should expect to make projections on a monthly basis for two years and annually for up to a period of five years. These financial projections will require you to make assumptions about revenues and investigate your expected expenses.
The income statement is a straightforward list of revenue (income) followed by a list of operating expenses. Revenue is the amount of services you think you will provide. Average figures of new patient frequency, average number of office visits per patient and per visit charges are available through published surveys. To develop these figures, The Official ACA Statistical Survey Package is a good source and reference document for your plan.
The next consideration is the payer mix and the timeliness of payment from these sources. You will want to know what your cash flow will be and if you will be able to generate enough income to operate your business, pay yourself a livable wage and service your debt.
While at this point your income is a theoretical figure, the expenses can be developed with greater certainty. Operating expenses come in two forms (fixed and variable) and can be determined with basic research. Expenses include items such as rent, salaries, utilities, leases, insurance, supplies, taxes, etc. One thing to note is most of your expenses will be fixed, meaning they will occur with regularity on a weekly, monthly or quarterly basis.
After working the income statement, your revenue projections and costs have been determined. The profit and loss statement (P&L) is relatively easy to prepare once you have your figures in line. The net difference between income and out flow will be either a profit or a loss. As the practice matures and new patients are attracted to the office, the profit figure should move in a positive direction. Adjustments to both components of these documents will have to be made on a regular basis as you encounter mid-course changes.
The pro forma should reflect the practice growth that is expected. New practices will generally experience an accelerated growth rate in the early stages and slower growth as the practice matures. The growth rate will depend to a certain extent upon the marketing effort, however, it should be remembered that double digit growth typically cannot be maintained over an extended period of time. The rate of growth is limited to population increase and the inroads made into the portion of the health care market not currently utilizing chiropractic care. A chiropractic practice has the double edged position of relatively limited usage in the population. The potential patient market is larger than the current patient market, however, utilization has been relatively stable over an extended period of time.
The development of your expenses will also allow you to determine the cost per patient and break-even analysis. A workable cost per patient figure can be developed by calculating your recurring costs over a period of time and dividing this figure by the number of new patients during that period. The cost per patient is sensitive to both your cost overhead and amount of new patients. This figure will give you some idea of your real cost when considering new equipment or adding other additional expenses. The break even figure can be developed in the same fashion. Take your total costs (fixed and variable) to operate and divide by your average collections per patient to determine how many services must be delivered to reach equilibrium.
Cash Flow Management
Your business plan should include how you are going to manage your cash flow. These topics include collection policies, how you are going to monitor aging accounts, if you are going to outsource your billing/collections and if you plan on selling your accounts receivable (factoring). Your cash conversion cycle (from providing the service to bank deposit) determines your average collection period ratio.
This ratio is important because of the "time value of money." A dollar today is more valuable than a dollar a year from now. It is more valuable because the dollar a year from now carries a certain amount of risk (rate of inflation, will you actually get the dollar) and opportunity cost (what could you have done with the dollar if you actually had it). A long receivable turnover period (including financing personal injury care while you wait for a possible settlement years down the road) generate additional costs in the form of lost revenues.
Thoroughness in the financial section is important. The excitement of beginning your own practice can quickly be tempered by the harsh realities of the marketplace. By investigating the financial aspect of your practice and writing a financial plan, you will be able to enter the healthcare market with a good idea of what is going to happen. You will have an idea of start-up costs, operating costs and contingent plans for the unexpected. No matter how big your heart or how talented your hands, if you can’t keep the door open, you can’t serve patients.
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