Overhead Expense Formulas For New Practices

Dear Dr. Hayes,

I am working on a business plan for opening a new practice (cold) and need some advice. As you suggested, I am trying to work backwards and start with my projected gross and desired net so I can come up with a workable budget.

The tricky part is figuring out the minimum equipment and inventory I will need to have a modern and appealing practice.  

Do you have any additional formulas/recommendations for brand new practices?

Thanks,

Dr. Jill

Dear Dr. Jill,

I often get asked if there is a different set of expense ratios for new practices. The answer is

not really.

As a new practitioner, you just have to accept that reality most of your expense ratios will be high, your net income low, until you hit at least $400,000 per year in collected gross revenues.

If you follow the Hayes Seven Key Expense Areas, the suggested spending range for patient examination equipment is about 5-6% of your gross income.

Therefore, you want to tailor your loans and leases for equipment so that your total payments are in that $20,000 to $24,000 range the year you hit $400,000 in gross collected revenue. From there, you afford more as your gross revenues increase.

Having said that, you are going about the planning process in exactly the right way!

Projecting your future income and expenses is called creating a ‘proforma’ which is defined as "a financial statement prepared on the basis of some assumed events and transactions that have not yet occurred."

Yes, there is some guesswork involved with how much you need to spend setting up your office. And it is particularly difficult to decide what you can expect in terms of revenues.

Good luck and keep us posted on your progress.

Regards,

Jerry Hayes, OD

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