In this third segment of our four-part series on opening a start-up practice, I want to concentrate on projecting revenue and monthly expenses. This can be the most difficult part of a business plan, but also the most crucial: how much business will the new practice generate and can we pay our bills?
This part involves some guestimates and assumptions, but a good business plan always backs up every projection with facts.
If you recall, we are building a model to open a very modest practice, while earning all personal income by working in another practice as an employee. We have limited our initial start-up expense and we hope to pay our ongoing monthly expenses fairly soon; such as by the fourth month. Please refer to the previous tip articles in the archive at optometric.com.
Monthly expense overview
My friend Jerry Hayes, OD is often credited for developing the seven major expense categories that many ODs use to track expenses and compare norms with other practices. Let's look at those and how they relate to our new practice.
Cost of goods. This is an expense that I don't mind at all, because it is only incurred when we sell something! This is a variable expense and it is usually about 30% of gross revenue. We will cover this expense when we analyze the practice income below by deducting it from revenue.
Staff payroll. This will be a big expense, but for a new, small practice it is not too bad. I don't recommend much of a staff to start and the optometrist will have to do many tasks that eventually I would never want him or her to do. I strongly believe in delegation, but not in the beginning. The doctor may do most of the eyeglass dispensing and may even have to answer the phone at times. We want positive cash flow first, and then hire more staff. Maybe a spouse or family member can help out as a receptionist. At any rate, we will budget for one staff member as a receptionist at $2,000 per month.
Occupancy cost. This is the biggest expense for the new practice. You must have an office and even if it is small and not the fanciest, you can spend a lot. You may have some build out expense rolled into the rent. Let's plan on $3,000 to $5,000 per month.
General overhead. Office supplies and miscellaneous items go into this category, but you can keep it low to start.
Equipment. We have an expense here, but since we resisted buying a retinal camera and only chose a basic exam room set-up which is leased, I would estimate the monthly cost to be around $600.
Marketing. We need to get the word out to the community about the new practice, but we can also do a lot of marketing by participating in the Chamber of Commerce, and other local groups. There will be some expenses, such as a big grand opening celebration, a couple of large direct mail pieces to local zip codes and some newspaper announcements. I would have a great website and a business Facebook page that is active. Do more marketing as cash flow permits, but be careful because many forms of advertising just break even or lose money.
Net income to owner. This is zero to start. You earn a personal income from your other job.
If we add these up and throw in some wiggle room, I'd estimate the cost for our new practice at about $10,000 per month. Let's look at how we might be able to pay for this.
This part is a bit more of a guess, but let's assume we can attract just two patients per day on a five day week. That is ten patients per week but you will more likely see them on one evening and Saturday. Or on a couple of half days per week. By the way, I want the office open five days per week with your receptionist, but the doctor is by appointment only and is not in the office every day.
Given that we see 40 patients per month, follow my math based on typical clinical experience and realistic fees:
Multiply 40 times a weighted average of exam fees, including medical eye care: 40 patients X $100 = $4,000. This could be higher but I'm being conservative.
Project that 70% of the patients buy glasses. Some buy none, some buy two pair. 28 patients X $350 (gross for now) = $9,800.
Project 30% obtain contact lenses. 12 patients X $370 (service and product) = $4,440.
Total income = $18,240 per month ($218,880 annually).
That is pretty impressive for a new practice seeing only two patients per day!
Breaking down the income and expense looks like this:
Monthly gross revenue = $18,240.
Deduct cost of goods sold at 30% of gross = ($5,472).
Subtotal or gross margin = $12,768.
Less monthly expenses from above = ($10,000).
Subtotal or net income = $2,768.
This is simplified; we did not consider debt service, taxes, unforeseen events, etc. But we did have a generous monthly expense that will cover some of that.
Based on this scenario, we actually are making a net profit of $2,768 per month! We are not relying on the practice for personal income so that would accrue in the practice checking account to be used as needed. These calculations are based on an average month, but income and expenses will vary widely.
You may not see two patients per day in the first week or month, but it is quite possible to so by the fourth month. We had three months of office expense built into our start-up costs.
Next week, I'll tie up some loose ends and offer more tips about opening hot – not cold.