At this point in the process, you’ve compiled a list of your potential locations. Whether or not you select 5 locations, 7 locations or 10 locations or another number is up to you. It largely depends on what your numbers tell you and how much you want to be able to grow.
With that information in hand, you want to take the next step in the process: putting together a set of projections. You’ve heard that anyone who enters into a new business or new line within an existing business puts together a business plan before investing any material sums in that business. When you go from an 1-2 office practice to a practice with double-digit locations, you are entering into a new business. Heck, in life, you wouldn’t make a major move without a plan. Here is your chance. The business plan usually consists of written descriptions and a financial projection. Here, we’ll focus on the projection. Your projections do 2 things for you:
First, putting together projections allow you to think through the different issues that will affect your business. You’ll be able to consider what you expect patient volume to be, what will total advertising spending be for the whole practice, how many total employees will you need (we’ll get into all these topics as the roadmap progresses). Once you’ve thought through everything and done your projections, you can decide if your plan makes sense. If your projections tell you that you need to invest $4 million to earn an additional $150,000 per year, the reward may not justify the risk and effort. Second, if you need financing at any point in the process, a business plan and projections are required.
Keep in mind that the projections are simply your best estimate. Things almost never work out exactly as anticipated, but at least you have a plan going into it. If and when events change, you can either revise the model or change your decision to fit the model you set up.
Despite what you may be told, outside of needing to include the basic financial statements – balance sheet and income statement-- there is no magic as far as format or time required for a projection. Our initial projections were compiled during a weekend sequester at a Ramada Inn in Gulfport, MS. We prefer the same income statement format as we do for our analysis of results. Link to that is here. In this case, the numbers are simply projected instead of historical.
For us, the most challenging part of constructing a projected income statement is coming up with a projected revenue number, also known as the top line. Once you have that done, all of the other pieces of the puzzle fall into place. I’d strongly suggest that you use a spreadsheet application like Excel to prepare this because once you do the first set of projections, you will probably want to revise your assumptions, especially if your initial assumptions result in projections that do not make sense.
Personally, I find it easiest to compute the expected revenue from a single, average patient and then multiply that result by the total number of patients that you expect to start in a month and your ongoing patients.
To start with revenue from a single patient, you need to start with the standard monthly payment arrangement and an estimate of what bad debts will be. As hard as you work on receivables, some people just do not pay or are unable to pay. In a number of cases, a patient will leave treatment before the contract payment term is complete. To keep your model reasonable and conservative, include a percentage for bad debts.
Here’s an example. Let’s assume that we have a practice with no down payment, a $100 payment for records and a payment of $200 per month over the next 20 months ($4,100 total fee). Whether or not you treat the patient over a period of 18 or 25 months or see the patient once every 6 or 8 weeks is irrelevant here. We are simply focused on the financial side of things. Let’s also assume a very conservative 15% bad debt and early termination percentage. Our single patient model may look like the following for the first 12 months:
Month 1: $85 ($100 less our 15% reduction)
Month 2: $170
Month 3: $170
Month 4: $170
Month 5: $170
Month 6: $170
Month 7: $170
Month 8: $170
Month 9: $170
Month 10: $170
Month 11: $170
Month 12: $170
Easy enough so far. Now, we need to include the expected number of paying patients each month. Let’s assume that the practice will start 20 patients per month. In month 1, you will have 20 paying patients paying at the month 1 rate above. In month 2, those 20 patients will make their month 2 payments and 20 patients will start and make their month 1 payments. In month 3, you will have 40 patients making a payment in months 2-21 and 20 new patients making a month 1 payment. Over the first 12 months, here’s how our patient numbers look:
Month 1: 20 patients at $85/month (see above) + 0 patients at $170 per month = $1,700
Month 2: 20 patients at $85/month (see above) + 20 patients at $170 per month = $5,100
Month 3: 20 patients at $85/month (see above) + 40 patients at $170 per month = $8,500
Month 4: 20 patients at $85/month (see above) + 60 patients at $170 per month = $11,900
Month 5: 20 patients at $85/month (see above) + 80 patients at $170 per month = $15,300
Month 6: 20 patients at $85/month (see above) + 100 patients at $170 per month = $18,700
Month 7: 20 patients at $85/month (see above) + 120 patients at $170 per month = $22,100
Month 8: 20 patients at $85/month (see above) + 140 patients at $170 per month = $25,500
Month 9: 20 patients at $85/month (see above) + 160 patients at $170 per month = $28,900
Month 10: 20 patients at $85/month (see above) + 180 patients at $170 per month = $32,300
Month 11: 20 patients at $85/month (see above), 200 patients at $170 per month = $35,700
Month 12: 20 patients at $85/month (see above), 220 patients at $170 per month = $39,100
Now, keep in mind that as we progress through payments, after month 21, those patients who started in month 1 will discontinue paying and will thus fall out of the revenue model. They could very well still be in treatment, but for purposes of our financial model, they are not included. Here’s how things will look once we get into those months:
Month 20: 20 patients at $85/month (see above) + 380 patients at $170 per month = $66,300
Month 21: 20 patients at $85/month (see above) + 400 patients at $170 per month = $69,700
Month 22: 20 patients at $85/month (see above) + 400 patients at $170 per month = $69,700
Now, you may decide that revenue of $70,000 per month is too aggressive. In that case, pull back on your new patient estimates or reduce the expected monthly payment. You may decide that the practice will continue to grow after Month 22. In that case, you may want to tweak your monthly estimates of new contracts or look at a fee change after opening or whatever part of the model you want to move. With a spreadsheet setup, this is easy to do. In the end, the results need to make sense to you. If they make no sense or look too aggressive, you need to adjust your model accordingly.
From there, multiply by the number of offices in the business. You may want to add some detail to model by having different fees, monthly contracts or bad debt percentages for each office depending on the areas you plan to enter. It's all up to you there. Just make sure to add the revenue for each office when that office opens. Remember that if you add 5 offices, you are probably not going to add all 5 on day 1. How that spreads out will be the subject of a future post in this roadmap. For now, you might want to assume a new office opening every 9 months just to be conservative.
From there, multiply by the number of offices in the business. You may want to add some detail to model by having different fees, monthly contracts or bad debt percentages for each office depending on the areas you plan to enter. It's all up to you there. Just make sure to add the revenue for each office when that office opens. Remember that if you add 5 offices, you are probably not going to add all 5 on day 1. How that spreads out will be the subject of a future post in this roadmap. For now, you might want to assume a new office opening every 9 months just to be conservative.
Once you have your monthly numbers, simply aggregate them to come to quarterly results or leave them as a monthly model. We prefer the quarterly view, but whatever makes sense to you and will be useful to you is the way you should go.
If we summarize monthly, here’s what we get:
Quarter 1: $15,300
Quarter 2: $43,900
Quarter 3: $76,500
Quarter 4: $107,100
In our next post, we’ll show you how to build the expenses part of your projection. This certainly isn’t the sexiest part of the process, but it is important for the reasons we described above. If you feel like you want someone else to handle this, there are a number of options for you. Websites throughout the internet are dedicated to helping you prepare a business plan and projections. Our friends over at American Business Consulting (www.proabc.com) have proven, readable, financing-friendly business plan services. Certainly, your accountant or consultant is happy to provide you with that service. Fees will vary.
We are happy to help as well with our standard charge of $0. Feel free to contact us at any time.
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