Building for the New Year - Investing in your Practice

Begin with what we call a “Viability Estimate” or “Cost / Benefit Analysis”. There are two parts to the analysis. 

 

First, estimate the ongoing cash flow impact of your investment. You will need to calculate the “additional net cash flow”. For example, if you want to increase the size of your dispensary, start by estimating the new revenues. This might be the dollar amount of new frames and lenses you can sell less the costs of goods sold (this is your income). Compare the income to the additional ongoing expense
of the larger dispensary. Expenses may include additional lease expense (if any), additional payroll expense, utilities, etc. The difference between the incremental income less incremental expense is your “additional net cash flow”. If the “additional net cash flow” is negative, it’s helpful to identify it before making the investment.

 

Second, estimate the capital expense or “investment” required to complete the project. In our example, this is the total cost you expect to incur to build and stock your dispensary. This “investment” includes costs such as construction,
new furniture, fixtures, equipment, inventory (unless on consignment), etc. Capital expenses are generally non-recurring up-front costs.

Back to our dispensary example: Let’s assume the additional net cash
flow is estimated to be $25,000 per year and the capital costs are estimated to be $100,000. Is this a reasonable investment? These figures represent a 25% annual cash on cash return. Not bad considering prevailing stock and money
market returns. Desired percentage returns should be established by you. Comparisons to returns from alternative investments such as stocks, bonds and CD’s can provide a benchmark for the determination of relative expectations.

For those of you who choose to finance all or a part of the $100,000 “investment”, you can reduce your “additional net cash flow” by the annual debt service. This will
result in the expected net cash flow to you. A situation could exist where the “additional net cash flow” is positive but the net cash flow (after debt service) is negative. If this occurs, look at the following: 1) Can you afford the negative cash flow? and 2) Will the investment continue to provide the “additional net cash flow” long after the debt is paid off? If yes, it probably makes sense to invest.

If both the net cash flow (after debt service) and the “additional net cash flow” are negative, then you have to decide if the investment must be made as a “cost of
doing business”. This decision is based on the perception of your practice if you do not make the investment. In other words, would your practice be deficient compared to other practices or would patient care be compromised? Both of these outcomes could result in patient loss and income declines. Every business faces similar decisions.

 

These tools are only part of an overall due diligence process. Your accountant should validate the results and advise you on the final decision. If your investment passes the Viability Estimate, call Vision One to see if you qualify for financing.

Make sure your Viability Estimate is backed up by bids for service such as an architect or contractor for space build out, vendor bids for equipment, etc. Don’t sign any actual contracts until your financing has been arranged. If your project involves leasing additional space, ask your landlord if space is available and at what rate and terms. Make sure your remaining lease term is long enough to realize the “additional net cash flow” for many years. If your lease expires in two years, how do you benefit by making a substantial investment today? If you have to relocate, you will not realize your investment return and could lose your entire investment. If the loan is relatively large, lenders will require the lease term be not less than the term of the loan. 

 

Remember, the success of your project and practice is your responsibility. However, there is plenty of help available if you know where to look.

 

 Vision One has assisted numerous independent optometrists in the successful expansion of their practices. Make us part of your project team. It’s never too early to call Vision One to talk about your practice dreams for the New Year.