Your Healthcare Project Financial Proforma – Determining cash needs

How much cash do I need?

How much cash will I need to pull this idea off?

Maybe you’ve got plans to open a new private medical practice?  Or is it that you’re finally about to make that move on opening a second office?  Perhaps you’re interested in entering the assisted living market, or have decided to add a subacute program to that skilled nursing facility you own.  The healthcare industry is full of interesting opportunities and needs.  Hopefully you’ve done your homework.  If so, then by now you know the business, completed a market study, and have sized up the competition.  And let’s assume that even the financial projections add to the indicators suggesting that your business venture may be worthy of a green light.  So now it’s time to answer that make-or-break question about needed cash … but where do you start?


Identifying the cumulative negative cash as part of the break even analysis on your healthcare project

Determining how much cash is going to be needed to fund that period between inception and break even is one of the key points covered in a financial feasibility study.  Typically, on a cash basis there are losses in the early months of most healthcare business ventures because it takes a little time to ramp up sales, patient visits, or facility occupancy.  Referred to as negative cash flow, or just negative cash, it’s a time when collected cash hasn’t yet exceeded cash being spent on fixed and variable costs.  And it’s that lowest point, the total of all cash losses before positive cash flow starts to take over, that’s so critical to determine.

The idea is to predict the cumulative negative cash to the greatest degree of accuracy possible.  Doing so will create a bit of a crystal ball in determining the amount of cash needed to fund your healthcare project until its able to support itself through ongoing operations.  It’ll also be an indication of whether the proposed project is a good use of all that cash given the return and the time that it takes to earn back the cumulative cash losses.

So, how can you improve the accuracy of a financial proforma so that it’s more apt to reflect “real world” outcomes?  Well …

10 things that will improve the accuracy of your healthcare project’s financial proforma

  • Don’t kid yourself into thinking that there won’t be some struggles.  Be conservative in your estimates.
  • Itemize both your revenue and expense line items in the same detail that you would a profit and loss statement for the project.  Don’t use global categories, like “labor cost”, based on un-vetted “industry average” information.
  • Make sure your model is broken down to individual months.  And extend your projections to the end of the calendar/fiscal year after the year in which stabilized sales have taken place.  You’ll want to look at a complete twelve month period with stabilized sales.
  • Make sure you account for unusual, one time purchases in the early months of your project.  Things like medical equipment purchase, initial supply stocking, facility licenses, and special promotional costs can use considerable cash.
  • Integrate an inflation factor into your model, and be sure to tie it to only those select line items for which it will apply.
  • Your ability to run “what if” scenarios is imperative.  Don’t make the mistake of creating an inflexible model.
  • Decide whether to buy or lease select items.  Shelling out six figures for a piece of diagnostic equipment  vs. leasing it carries obvious implications on use of cash in the early stages of a new business venture.
  • Accounting for your anticipated collection patterns is critical.  Project your incoming cash based on realistic collection time frames.  Divide your charges each month into aging buckets of 0 – 30, 31 – 60, 61 – 90, and 91 – 120, and 120+ days.  And don’t forget, as much as you’d like to, about allocating at least two percent of revenue for bad debt.
  • If you’re planning on borrowing funds, whether for equipment purchase, construction costs, or both, be sure to account for the anticipated debt service in your projections.  And keep in mind, lending institutions like to see contingencies built in to your projections.
  • Some costs represent cash outlays that are one time annually.  Things like tax return preparation, licensing, rent increases, various fees, etc.  Make sure that you build these into your projections at those exact time intervals when they become due.

A new business opportunity in today’s healthcare market can be exciting and profitable.  It can also be cash strapping and worrisome.  Careful, diligent financial planning will set your organization on a path that will guide it through the important decisions that will need to be made.  And it’ll let you know what your investment needs are … and if they’re worth it.

Lastly, with so much riding on these decisions, know what your limitations are.  Oftentimes a qualified third party who has expertise in healthcare financial modeling is just what’s needed to set the course.

When you need proven expertise and performance

Thomas M. Lee, Partner

Mr. Thomas M. Lee has over 35 years of experience in the business of healthcare with special emphasis in operations management, financial analysis, financial forecasting, construction projects, and new program development.