Now that you’ve gotten revenue looking exactly like you want, it’s time to set up your projection for those expense items. As you go through your expense projections, keep 2 things in mind. First, are my numbers conservative. In other words, in the face of uncertainty, have I somewhat erred to the high side of the cost amount. For example, if I ask for an insurance quote and the agent gives me a number of $753 per month, to be conservative, I would round that number up to $800. Second, do the final numbers make sense to me? If my employee cost number comes out to 5% of revenue in the first 6 months, that result does not make intuitive sense. Something is wrong and must be revised.
Here are some tips as you create your individual expense items:
Employee costs (don’t worry, we’ll explain the *** at the end of the post)
When you start, you can probably assume that you will have one front desk employee working each work day of the month (on marketing mostly during non patient days) and 0-1 clinical assistant. As volume grows, you will want to add people to address that volume. If you have a clinical assistant to start, you can either hire someone new or, ideally, use a person from your existing office(s) when the need is relatively small***.
Over time, you can perform this computation: take your projected patient load for the month and divide it by the number of patients you can see per day to get the number of days per month that you will require a full staff. Let’s assume that you project to have 400 patients in a given month and that with 3 clinical assistants on board, you know that your technique and skill allows you to see 50 patients per day. That means that you will have 8 production days for the month (400 / 50). Easy.
To be conservative, let’s assume that you will need to start with 2 people working full time making an average of $15/hour. Also, keep in mind that any projected employee costs will need to include a burden for employer payroll taxes and potential other benefits. We use 20% as our rate. So, in month 1, you will have 2 people * 22 work days per month * 8 hours per day * $15/hour * 120% = $6,336. This is your projected employee costs for month 1.
Now, when the office gets to 400 patients, let’s assume that you will have 2 front desk people and 3 clinical assistants all working full time (although this may not be the case***). So, our computation becomes 5 people * 22 work days per month * 8 hours per day * 15/hour * 120% = $15,840.
Does that $15,840 number make sense? Well, we project monthly revenue of $69,700 when we get to a full sized office. That means that employee costs come to 22.7% of revenue ($15,840 / $69,700). That is just a bit higher than our benchmark employee costs percentage of 21%. So, it is both reasonable and conservative. We can move on.
Marketing
Here, you will want to make sure that you spend at least a minimum amount in each month, especially when starting out. Obviously, making the investment to get new patients into the office is vital. We discussed that more in detail in our marketing budget post. Over time, that percentage will gradually flow towards the 5-10% of revenue number appropriate for your market. You should marketing as a percentage of revenue around month 15-18. Beyond that, you may want to consider increasing spending in months 1-3 to prime the pump for new patients and do the necessary grand opening advertising.
Rent
This will generally be pretty fixed. Yes, things like CAM and real estate taxes can vary, but even without a lease, you can take the prevailing rent per square foot in your area and multiply by the square footage that you will estimate for each office.
For example, let’s say that retail/doctor office space is going for $20 per square foot (triple net) and you estimate that your office will be around 2,000 square feet. That results in annual rent of $40,000, or $3,333 per month. You may want to set rent at $3,500 per month to be conservative.
Clinical supplies
Estimate your initial cost to get a 30 day supply of everything you will need. That will be your month 1 cost. From there, cost will be a function of the number of patients. You can estimate 10% of revenue initially and then down to 8%, or lower if you are part of the MPE Purchasing Collective.
Lab expense
This will probably be very small initially and then grow as your patient load grows and then grow more as patients debond. In a dental practice, this will probably start at a minimum amount of $500 per month and then grow. In either case, lab expense will usually end up being around 2-3% of revenue over time.
Other operating costs
Here, you should probably start with a minimum of $5,000 per month in the first couple of months. Consider all of the costs incurred when you start up: office supplies need to be fully stocked, you will incur costs to get your practice management software up and running (check out our podcast on that), insurance payments may need to be made up front, there may be an initial charge from your phone or internet provider and so forth. There are a lot of startup items in here so don’t be afraid to be conservative.
By month 12-15, this should settle in around 12% of revenue and then down to 9% by the end of year 2 just to be conservative.
*** One of the top benefits of opening up multiple offices is the ability to spread costs across a number of different facilities. Consider one office with a need for 8 production days. You would be hard pressed to find staff who are willing to work only 8 days per month. You need to bring them on full time which means that for the majority of the month you have non-patient days and a strong potential for idle time among the staff. Now imagine that you have 3 offices running 8 patient days. You can simply move the staff to each of those offices (assuming travel is not a major issue) and have them all be productive on each day. You are paying the staff approximately the same amount (again, travel costs may add a bit), but now they are seeing patients every work day instead of under 40% of their work days.
Same holds for advertising costs. If I have 5 offices in the Atlanta market, I can run 1 TV ad and have that cost be shared among all 5 offices because all of them will benefit from that one ad. Even large offices will be individually burdened if they had to pay for TV in a top 10 market.
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