Finances

Project Profit Gains–Then Add Office Space

By Rachael Click, OD

Sept. 2, 2015

SYNOPSIS

Expanding your existing space can grow revenues dramatically. Before taking a big step, project increased profitability based on six criteria.

ACTION POINTS

GAUGE GROWTH RATE. Assess how much you can grow within your present space. Compare with your practice growth goals.

ESTIMATE PROFITABILITY. Compute additional patients visits, optical sales and revenues to determine profitability in the new location.

PLAN ENHANCEMENTS. Along with adding space, compute growth fromenhanced technology in the optical and in the pre-testing areas.

In planning practice growth, it’s common to envision moving to a new location, perhaps even constructing a new building. Consider, however, the opportunity to add adjacent space. You can continue to keep your practice running, providing continuity to your patient base, while addingspace that will allow more exams, and correspondingly, moreoptical sales.

I currently lease my office space, and plan to add the adjacent space in our building.My current space is 1,650 square feet. I am adding 1,500 square feet for a new total space of 3,150 square feet. I have considered buying real estate, but I live in an area where land is very expensive, and at the moment, it is cost prohibitive for me to buy real estate. However, one of the pros to leasing is that it is a direct business expense that I will be able to use on my P&L every year. I plan to finance the cost of the expansion through a bank business loan.

Blueprint of Dr. Click’s current office space (shaded), with adjacent space (lined)that she plans to add to her lease. Dr. Click’s expansionis based on projected numbers of additional examsand added services.

Can You Adequately Serve Your Patients?

I started thinking about moving to a larger location a few years ago when I realized that if I continued in the same-size location then I would not be able to adequately service my patients. Thankfully, my growth rate has continued at 25 percent for several years, and I now feel comfortable in seriously investigating an expansion. I am currently unable to see any more patients, or even hire an another employee because I am limited in space. Once I saw that I was booked 3-4 weeks out, and unable to accommodate my demand, then I knew it was time to expand.

Estimate Profitability in New Location

It’s different for every practice owner, but for me, the financial deciding point was looking at revenue per patient, daily current exams and how far out I am booked.

The expanded space will allow me to hire more people because I don’t have the room now for more staff members, which will, in turn, allow me to see more patients. There will be an increase in expenses, but the ratios/percentages of each expense should remain proportional. However, the revenue will be more, thus making the expansion profitable.

I am planning to double the current space in the new location, so it will cost me ~80 percent of what I paid when I opened my practice. I will be able to recoup the cost and profit much fast than when we first opened because there is now an established patient base. Patients get very excited when they see growth, and I am projecting a 25 percent growth just based on the expansion.

My current revenue per patient is $400, but only a 45 percent capture rate. My plan is to increase my capture rate at least 10 percent because we will have more room to work and better manage efficiency. My consultants are telling me that I can project and expect a 25 percent increase in gross in the first year. According to my projections sheet, one additional patient a day breaks even the additional rent and bank loan expenses. I plan on adding one exam room now, and will equip the other rooms with growth, but I hope to achieve a 25 percent growth over the next three years.

Establish Goals for New Location

One goal that I hope to achieve is to double or triple my optical retail space. This will give patients more options on frame selection in different price points and styles. Another goal is to have a dedicated exam room for contact lens follow-ups. The third goal is to have more exam rooms that will allow us to see more patients, which may lead to hiring another doctor to the practice.

Can You Enhance Care in New Location?

The extra space will allow us to upgrade technology in the optical. I would like get a virtual frame board that will allow patients to try on frames of any line that we carry in any color they desire. This will allow us to display the top-selling lines, models and colors. With this added technology, our Rx walk-out rate should decrease.

The extra clinical space will allow us to have auxiliary medical equipment that we currently do not have the room for. We could dedicate a room for auxiliary testing. We could also potentially have a second pre-testing room.

Will You Need to Hire More Staff?

The new space will definitely create new jobs in the practice. There are three benchmarks that I look at when determining if I need to hire additional staff. One is the percentage of payroll for the gross. I try to keep that number around 22 percent, but use the range of 18-24 percent because I am a solo practice. I also look at staff productivity per hour. That number should be $70-$90 per hour. The third number I look at is gross revenue. A lot of resources recommend one full-time equivalent staff member for every $150,000 of revenue. I typically don’t use this metric to hire, but rather, as a metric for what I expect a staff member should be able to contribute to the gross revenues once trained.

Because I try to keep staffing expenses as a ratio to gross revenue goals, I am still expecting to see a 25 percent growth based solely on the expansion, but if I am able to be “over-staffed” for a few months, then I would expect to see at least a 30 percent growth because there are more staff members to help the additional patients.

Get Your Finances in Order for Move

I have made sure that I am always up to date on my QuickBooks financial files. This allows me to instantly generate P&Ls, balance sheets and other reports. I also have a cash flow analysis Excel spreadsheet that allows me to track my current cash flow. In addition, I have been very diligent in saving revenues. I always save a minimum of 5 percent of the monthly receipts.

Now that I am asking for a loan, I have a projections worksheet that my consultant has given me. This allows me to see how much the new space will cost, as well as projections for growth.

Rachael Click, OD, is the owner of Preferred EyeCare Center in Mount Pleasant, S.C. To contact her: drclick@preferredeyecarecenter.com.

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