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Start It Up: Finance - Mastering the Numbers Game


In this, the second of our six-part series on launching a new practice from scratch, expert Laurie Hyland Robertson explains how to develop a reasonable budget for the early years. Don’t even think about opening your own shop until you’ve read this.

About This Series
Have you been pondering striking out on your own, making the leap from employed associate to practice owner? Or are you just starting out in practice, and wondering if it’s worth going even deeper into debt to start your own venture rather than getting “a job”?

Whatever your situation, Physicians Practice is here to help with our comprehensive six-part guide to starting a medical practice. In addition to the pre-opening day planning advice you may have seen in other such guides, we’ll delve deeper into the key milestones you’ll need to meet for success long after you cut the ribbon.

Assuming you’ve lent some serious thought to your practice philosophy and dream location, as we described in Part One of this series on launching a practice (“Start It Up: Planning”), the next step is constructing the financial model. To form the underpinnings of this crucial bit of strategizing, all you need are reliable expense and revenue projections, plus a solid budget, for the first couple of years after opening. Piece of cake!

OK, we admit this task is not easy. But you must pay sufficient heed to the financial side or risk losing everything. It’s your practice, your money - and your job, says consultant Keith Borglum. “You can’t abdicate financial controls … to a staff person. The physician doesn’t have to learn to be an accountant, but they have to be able to read the reports intelligently.” On the bright side, says Borglum, “It’s a lot easier than learning medicine.”

Durable data

Too little financing is a death sentence for any new business, especially one whose major commodity is dependent on - and in most cases entirely limited to - its owner’s time. As a key part of your business plan, you’ll want pro forma statements listing best, worst, and average-case scenarios for a realistic mix of patients in your geographic area and specialty. These documents should cover at least two years and would typically include startup expenses, revenue and charge analyses, a fee schedule, and a break-even analysis.

One way to get started is with a consultant. We recommend someone experienced in helping guide startups, and who has particular expertise in developing budgets for new businesses. Sherry Migliore is one of many such consultants. “We work very closely with the physician to develop the assumptions for the financial analysis,” she explains, describing the process at PMSCO Healthcare Consulting in Harrisburg, Pa., where she’s director of consulting. “What are their revenues, their anticipated costs? If the physician is leaving another practice, they do have some track record of revenues and income … so sometimes we have a base to work with.”

For doctors straight out of residency, “we have a little more work to do,” Migliore says. “We’ll go back and look at similar information on similar practices, using our considerable data to work through the revenue and expense scenarios.”

“The more unusual your practice, the more important it is to have a consultant who can evaluate the business and marketing aspects of it,” says Borglum, citing the example of a dermatologist client whose practice is restricted to contact dermatitis. You might not think that such a narrow focus would be a viable business, but in this case it works because she started with a sound foundation of financial planning and is one of only a handful of such subspecialists in the region.

Your accountant is another source for help making sure your numbers are meaningful. In terms of the data behind those numbers, “Generic national figures are almost irrelevant,” says CPA Jerry L. Love, who’s been working with physician clients for nearly 30 years. He notes that instead of turning to an accountant, people sometimes unwisely obtain data through common-size financial statements, which express figures as a percentage of a common base term.

This is a mistake, he says. You may find, for example, that salaries represent 20 percent of gross revenues, “But the doctor doesn’t know what his gross is going to be,” says Love. “At the end of the day, if the doctor is going to have a nurse, an office manager, and a receptionist, he needs to know how much those salaries are going to cost.”

Love, a former chair of the Texas Society of CPAs, maintains that the best way to get this sort of comprehensive data is through a CPA in your area, who “will either know the answers to those questions or know where to find those answers rather than guessing.”

Just like in construction, there’s a real danger of underestimating the expenses for which you’ll need to plan - everyone knows someone who’s blown their kitchen remodeling budget by a triple-digit percentage. “We always tell doctors when we’re working with them on a feasibility analysis that we like to be conservative in terms of adding in more costs than we think we’re going to need,” says Migliore.

Physicians becoming practice owners for the first time, says Love, “will have a tendency to get the really major items like rent and labor and malpractice insurance and things like that, but they won’t necessarily remember or understand that there are a lot of other things you might have, like office supplies.” Drilling down into these seemingly trivial areas, which you might understandably overlook if you’ve always been a salaried employee, is crucial.

It’s relatively easy to estimate the expense side of the financial statements. Revenues can be tougher to build in, but it’s simple to find the Medicare rates of payment in your geographic area for the CPT codes you use most often - just search online for “Medicare reimbursement CPT” or a similar term, or ask your practice management consultant to supply them. Check out our annual Fee Schedule Survey for further guidance on average commercial rates.

But be careful about your assumptions. “Making up your own fee schedule: Now there’s a mistake!” says Borglum. He recommends using an RVU-based system, noting that this will be a simple proposition if you enlist expert help or purchase the pertinent data yourself (again, a quick Internet query should produce the results you need).

For all of these documents, start with a basic spreadsheet, which offers the flexibility to make additions and changes, and look at figures from a source such as the Medical Group Management Association’s Physician Compensation and Production Survey. In any case, “You need to make sure it’s a regional, not a national survey,” cautions Love. “A national survey taken in the metropolitan areas may not be representative of where you want to go.”

Tightening the belt

Taking into account personal finances will help in the construction of assumptions for the practice. It’s all but inevitable that you’ll bring home less than the average at first, so consider a conservative starting point for building your household budget - Love suggests a figure at or below 50 percent of mean salary for your specialty and region.

“There’s a startup period where money’s going to be tight,” he notes. “In two or three years, then you begin to move up to the lifestyle you want. Will most physicians be able to exceed that average income? Yes. But it’s part of being mentally disciplined not to walk in thinking that you’re going to make twice what that regional average is.”

If you can swing it, give yourself a margin of error by contributing at least some of the initial capital yourself. California family physician Eduardo Peña Dolhun, who started his own practice two years ago, explains how he made it through the startup period.

“I started out with nothing, just doing housecalls. I worked with other doctors who did housecalls - essentially I was referred out,” he recalls. “I had five or six patients, and I didn’t even have an office at first. I saved up my money and moved into my current office, and I shared the rent with three other doctors … for about a year and a half.” Two years after officially opening, Dolhun now has a satisfying cash-only practice with a comfortably sized patient panel.

Dolhun didn’t break the bank with outsized overhead. But many newbies do make that mistake, and many others overreach on lifestyle as well, resulting in a debt load too heavy for a young practice to bear.

Another common yet difficult-to-overcome problem for new practices is failing to pay quarterly estimated taxes. “The physician gets to the end of Year One and they owe $70,000 or $80,000 in taxes, and they don’t have it,” sighs Love. “And then they have to start paying on the next year’s estimated tax bill,” and so begins a vicious cycle of frustration.

Borglum has seen this particularly expensive tax faux pas, too, and says that hiring an accountant who doesn’t specialize in medical practices opens physicians to all sorts of additional pitfalls. “The default general ledger list in Quicken, for example, doesn’t distinguish between office and medical supplies, or between physicians and nurse practitioners,” he says. “And you do two or three years of accounting wrong before you realize it.”

After you’ve lined up the right software - and a teacher to help you get started with it - creating the break-even analysis will be an illuminating exercise. “Once you do that, you go from uncertainty to risk, and risk is measurable,” notes Dolhun. “So if you do want to get financing from friends, family, or a bank, you can go to them and say, ‘It’s going to take me six months to break even, and then I’ll be growing at 5 percent.’ Then you can talk with some numbers instead of saying, ‘I have this crazy wild idea of starting a practice … ’”

Negative cashflow

Your practice may be open six, nine, or even 12 months before any significant cash flows through the door. A little scary, yes, but as a savvy Physicians Practice reader you have no doubt remembered to include a (modest) salary for yourself in the list of startup expenses. Another expense many physicians fail to factor in is the actual cost of borrowing money - the interest you’ll be obliged to pay on your loan or line of credit.

But where is all this hypothetical cash supposed to come from? The bank with a branch on the corner and the friendly manager may not be the best place to start. “Lots of doctors waste a lot of time shopping around with community banks that make them jump through all these hoops, fill out SBA paperwork, and it takes six weeks, and then they deny them the loan,” says Borglum. “Most banks really don’t know about lending to doctors.”

So ask around - try your medical society, a practice management consultant, or colleagues in the area - to find an institution with a so-called “private banking” division. And note that although many major regional and national banks have a group that specializes in physicians (and sometimes other professionals as well), individual branches of those banks may not be aware of its existence.

All this is not to say that you don’t need to establish a relationship with an individual banker. On the contrary, you most assuredly do, as this person will offer help and guidance at every stage of your career. She will also be able to assist in fleshing out the pro formas.

Once those documents are in good order, obtaining a loan is relatively quick and simple for most physicians. You may be asked to put up collateral, perhaps in the form of your home, but in many cases you will be able to bypass the formal SBA process if your lender is experienced with medical practices.

Will the current economic downturn affect banks’ willingness to lend to upstart physicians? Probably. But healthcare remains a growth industry. Banks may require more detailed documentation of your intentions and a more in-depth business plan, but the exercise of providing that information will ultimately strengthen the practice and hopefully make its first years all the smoother.

Alternative financing sources are always available, too. Ask your accountant whether a venture capital firm is an option, for instance. Remember, any loan becomes vastly more complicated when you bring partners into the equation - it’s critical to consult with an attorney who can draw up the necessary protective documents.

In most cases you can expect to enjoy a steady stream of patients eventually. How quickly they begin to arrive on your doorstep depends on factors like the strength of your marketing effort. It’s therefore critical to build sufficient funds for a concerted marketing and PR strategy into the business plan. These activities will represent a significant expense in the beginning, so they should be part of the initial financial assumptions. A good marketing plan will help you keep that negative cash flow period to a minimum.

A few of Borglum’s favorite insider tips on the details:

  • Avoid multicolored stationery. “It’s going to cost you extra to print everything for the rest of your life. Most practices spend thousands of dollars a year on business cards, patient education materials, etc.,” he says. “Keeping those costs down is smart, because they can reduce your profitability significantly.”


  • If you choose to have a logo developed, take heed: “It’s not a mistake to have a logo. It’s a mistake to have the wrong logo.” Look at the design from the patient’s perspective. Avoid anything that reminds people of bodily fluids (or solids) that your specialty deals with.


  • Consider whether different is really better. “Every little weird administrative thing you do - like doing your own bookkeeping - pushes you a little further outside the mainstream and increases your risk,” Borglum maintains.

As in marketing activities, common sense and an appropriate degree of deliberation will take you surprisingly far along the financial road. Accountant Jerry Love sums it up: “Planning and anticipation of reality is a key part of being successful and not having financial frustrations.”

Laurie Hyland Robertson is a senior editor with Physicians Practice. She can be reached at lchrobertson@physicianspractice.com.

This article originally appeared in the April 2008 issue of Physicians Practice.

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