Working Capital

 

Working capital is one of the most important and misunderstood components of start-up optometry financing. Many new practice owners focus most of their attention on the visible parts of a start-up project: equipment, office design, leasehold improvements, signage, frame inventory, furniture, technology, and décor. Those items are important and necessary. Patients need a professional office environment. Doctors need clinical equipment. Staff need systems and supplies. The optical must have inventory. The practice needs signage and technology.

However, those visible items are only part of the financial requirement.

Working capital is the financial cushion that allows the practice to operate while patient volume develops. It is the cash that keeps the business functioning between opening day and the point at which the practice generates enough consistent collections to cover operating expenses, debt payments, owner compensation, and reinvestment needs.

A start-up practice rarely becomes financially stable immediately. Even a strong doctor, in a good location, with a well-designed office and a sound business plan, must still build awareness, attract patients, credential with insurance plans, develop referral relationships, generate online reviews, train staff, establish recall systems, and refine daily operations. During that period, expenses begin before revenue fully develops.

Working capital bridges the gap between the plan and reality.

Working Capital Is the Practice’s Financial Runway

A start-up optometry practice needs runway. Just as an airplane needs enough runway to gain speed before takeoff, a start-up practice needs enough financial runway to build momentum before it becomes self-sustaining. Without sufficient runway, the practice may be forced to make short-term decisions that reduce the likelihood of long-term success.

The early months of a start-up are often the most financially vulnerable. The practice may have limited patient volume, inconsistent collections, insurance credentialing delays, and significant fixed expenses. Rent, payroll, utilities, software, insurance, marketing, supplies, professional fees, loan payments, and vendor bills continue whether the schedule is full or not.

Working capital gives the owner time to execute the business plan. It allows the doctor to focus on patient care, marketing, team building, training, and operational discipline rather than daily cash pressure.

A start-up without adequate working capital may still open the doors, but it may not have enough financial strength to grow properly.

Why Start-Up Practices Do Not Generate Full Revenue Immediately

One of the most common mistakes in start-up planning is assuming that revenue will ramp up quickly and predictably. In reality, patient growth often takes longer than expected.

A new practice must first become known in the community. Patients must learn that the practice exists. They must trust the doctor enough to schedule. They must understand the services offered. The practice must appear in local search results. Online reviews must develop. Insurance credentialing must be completed. Referral relationships must be established. Community outreach must begin producing results. Staff must learn how to present services, schedule effectively, manage recalls, and convert patient interest into appointments.

None of this happens immediately.

For example, a doctor may project that the practice will reach 80 comprehensive exams per month within six months of opening. The location may be good and the marketing plan may be reasonable. However, if insurance credentialing takes longer than expected, Google visibility develops slowly, or community outreach takes time to convert into appointments, the practice may only reach 45 or 50 exams per month during that period. The business may still be on the right path, but cash flow may be weaker than projected.

Working capital allows the practice to absorb that slower ramp-up without immediately cutting the activities needed to grow.

Working Capital Pays for Ordinary Operating Expenses

Working capital is not extra money. It is not a discretionary reserve for optional spending. It is planned operating capital used to fund the ordinary expenses of the business while revenue develops.

Common working capital uses include payroll, payroll taxes, rent, utilities, insurance, software subscriptions, EHR and practice management systems, billing support, marketing, website costs, search engine optimization, signage, supplies, contact lens trials, office supplies, frame inventory support, lab bills, professional fees, accounting, legal expenses, lender fees, credentialing costs, repairs, and contingency reserves.

In many start-ups, these expenses occur before collections are sufficient. Staff may need to be hired and trained before opening. Marketing may need to begin months before the first patient visit. Insurance premiums may be due before revenue starts. Rent may begin before construction is complete unless rent abatement has been negotiated. Technology systems may need to be installed and paid for before the practice sees patients.

A start-up budget that excludes working capital is incomplete. It may finance the office, but not the business.

Working Capital Protects Marketing

Marketing is often one of the first expenses cut when cash gets tight. For a start-up, that can be a costly mistake. Marketing is not optional during the early stage of a practice. It is the mechanism that creates patient awareness and appointment volume.

New patients do not automatically arrive because the office is open. A start-up must be marketed consistently through a professional website, local search, Google Business Profile optimization, social media, patient reviews, community events, referral development, direct outreach, signage, local sponsorships, and relationship building with nearby businesses and healthcare providers.

If the practice lacks working capital, the owner may reduce marketing to conserve cash. That may temporarily lower expenses, but it also slows patient growth. Slower patient growth prolongs the period of negative cash flow, which creates even more pressure.

This creates a damaging cycle: limited cash leads to reduced marketing; reduced marketing leads to slower growth; slower growth leads to continued cash pressure.

A properly capitalized start-up can continue marketing during the ramp-up period, even when early collections are below expectations.

Working Capital Supports Proper Staffing

Another common response to cash pressure is understaffing. While payroll discipline is important, a start-up can be damaged by staffing too leanly. Patients form opinions quickly. If calls are missed, appointments are delayed, patients wait too long, insurance is mishandled, or optical service is weak, the practice may lose patients before relationships are established.

A start-up needs enough staff to answer phones, schedule patients, verify benefits, perform pretesting, assist with optical, manage billing, maintain recall systems, and provide a professional patient experience. The owner may be able to help with many tasks, especially early on, but the doctor’s highest and best use is clinical care, patient communication, practice leadership, and business development.

For example, a new practice may try to open with only one employee to save money. That employee is expected to answer phones, check patients in, verify insurance, perform pretesting, assist in optical, collect payments, clean rooms, and manage recalls. Even if the employee is capable, the workload may create bottlenecks and patient service issues. The doctor may then spend valuable time performing administrative tasks instead of seeing patients or developing the practice.

Working capital allows the owner to staff appropriately, train employees, and build systems that support growth.

Working Capital Helps Manage Insurance Credentialing Delays

Insurance credentialing can be a major timing issue for start-up practices. Even when a doctor submits applications promptly, credentialing can take longer than expected. Delays may affect the practice’s ability to schedule patients under certain plans, receive reimbursements, or participate in networks that are important to the target market.

If the business plan assumes full insurance participation by opening day, but key plans are delayed by several months, revenue may be lower than projected. The practice may still be viable, but the timing mismatch can create cash flow pressure.

Working capital helps absorb this delay. It allows the practice to continue operating, marketing, and building patient volume while credentialing is completed.

A doctor should include credentialing timelines in the start-up plan and should not assume every payer will be ready immediately. Conservative planning is important.

Working Capital Protects the Owner’s Personal Financial Stability

Owner compensation is often limited during the start-up phase. Many doctors expect to take reduced compensation while the practice grows. That may be reasonable, but it must be planned.

A doctor still has personal obligations, including housing, student loans, transportation, insurance, family expenses, taxes, and personal living costs. If the practice cannot support owner compensation and the doctor has no personal reserves or secondary income, personal financial pressure may affect business decisions.

For example, a doctor may plan to take no salary for six months but does not have enough personal savings to cover living expenses. After three months, personal pressure increases. The doctor may begin drawing cash from the practice prematurely, reducing business liquidity. Alternatively, the doctor may use personal credit cards or delay personal obligations, damaging credit.

Working capital should be considered together with personal liquidity. The start-up plan should answer two questions: how will the practice pay its bills, and how will the owner pay personal expenses during the ramp-up period?

A properly capitalized start-up considers both business needs and owner reality.

Working Capital Provides a Contingency for Delays and Cost Overruns

Start-up projects rarely go exactly as planned. Construction may be delayed. Permits may take longer. Equipment delivery may be postponed. Software implementation may be more complicated than expected. Tenant improvement costs may exceed estimates. Opening may be delayed. Marketing may cost more. Staff hiring may require higher wages. Insurance credentialing may take longer.

Working capital and contingency reserves help manage these issues.

For example, assume a practice expects to open on July 1 but construction delays push opening to September 1. The practice may still incur rent, insurance, utilities, software costs, loan interest, and staff training costs during the delay. Without working capital, the owner may be forced to inject personal funds or seek emergency financing before the practice even opens

A good start-up budget should include a cushion for the unexpected. The goal is not to predict every problem. The goal is to have enough capital to manage normal start-up uncertainty.

Working Capital and Debt Structure

Working capital can be funded in several ways. It may come from borrower savings, outside income, investor capital, a line of credit, or a term loan component included in the start-up financing package. The appropriate structure depends on the borrower’s financial position, projected cash flow, lender requirements, and overall project budget.

Some borrowers try to minimize the loan amount by excluding working capital. This can make the project appear less expensive, but it may increase risk. A lender may actually be more comfortable with a larger, properly structured loan that includes adequate working capital than with a smaller loan that leaves the practice underfunded.

From a credit perspective, undercapitalization can be more dangerous than a slightly higher loan amount. A practice that borrows enough to execute the plan properly may be stronger than a practice that borrows less and runs out of cash.

The key is not to borrow more than necessary. The key is to borrow enough to support a realistic plan.

How Lenders Evaluate Working Capital

Lenders evaluating a start-up practice will review the business plan, financial projections, personal credit, liquidity, management experience, secondary income, collateral, and the reasonableness of the start-up budget. Working capital is a major part of that review.

A lender will want to know how the working capital amount was determined.

• Is it based on projected operating expenses?
• Does it account for the ramp-up period?
• Does it include marketing? Does it include payroll?
• Does it account for owner compensation needs? Does it include contingency reserves?
• Does the projection show when the practice is expected to break even?

A strong working capital request is specific and supportable. It does not simply ask for “extra cash.” It identifies the expected uses and explains how the reserve supports the business plan.

For example, a working capital budget may include six months of payroll support, rent during ramp-up, marketing, software, insurance, professional fees, and a reserve for unexpected expenses. That is easier to underwrite than a vague request with no clear explanation.

Lenders also evaluate whether the borrower has personal liquidity. If the borrower has no personal reserves and the practice has limited working capital, risk increases. If the borrower has personal savings, secondary income, or other financial support, risk may be mitigated.

Determining How Much Working Capital Is Needed

There is no single working capital amount that fits every start-up practice. The amount depends on the size of the practice, market, rent, staffing model, owner income needs, payer mix, equipment debt, marketing plan, buildout timeline, and revenue assumptions.

Many start-ups need enough capital to support operations for an extended period, often 18 to 24 months, depending on the circumstances. That does not necessarily mean the practice will operate at a full loss for that entire period. Rather, it means the practice should have a financial plan that supports the ramp-up to stable cash flow.

The owner should prepare monthly projections showing expected revenue, expenses, debt service, and cash position. The projection should identify the month in which the practice reaches break-even and the month in which cash flow becomes consistently positive.

The owner should then stress-test the projection.

• What happens if revenue is 20% below forecast?
• What happens if opening is delayed by three months?
• What happens if staff costs are higher than expected? What happens if marketing costs more?
• What happens if the owner cannot take a full salary for the first year?

The answers to these questions help determine whether the working capital reserve is adequate.

Working Capital Should Be Protected

Once working capital is funded, it should be managed carefully. It should not be treated as available profit or excess cash. The owner should track it against the budget and use it for the purposes intended.

A start-up owner should review cash flow monthly, compare actual results to projections, and adjust early. If revenue is below forecast, the owner should understand why.

• Is patient volume low?
• Is marketing ineffective?
• Are insurance plans delayed?
• Are conversion rates weak?
• Are expenses higher than projected?
• Is staffing inefficient?

Working capital buys time, but it does not replace management. The owner must still execute the business plan.

If working capital is used too quickly without corrective action, the practice may face financial pressure before reaching stability. The reserve should be actively managed.

Signs That Working Capital Is Inadequate

Several warning signs may indicate that a start-up is undercapitalized. The practice may begin delaying vendor payments, reducing marketing, avoiding necessary staff hires, using credit cards for operating expenses, drawing too heavily on personal savings, missing budget targets without corrective action, reducing inventory below appropriate levels, or deferring necessary equipment service.

Another warning sign is when the owner stops reviewing financial reports because the numbers are uncomfortable. Financial visibility is most important when cash is tight.

If these signs appear early, the owner should respond quickly. Options may include adjusting expenses, increasing marketing effectiveness, revising scheduling, improving collections, negotiating vendor terms, obtaining additional financing, or modifying owner compensation expectations. Waiting until cash is exhausted limits options.

Working Capital Supports Practice Value

Working capital does more than help a start-up survive. It can help the practice become valuable. A practice that has enough capital to market properly, staff adequately, train employees, manage inventory, provide strong patient experience, and invest in systems is more likely to develop sustainable cash flow.

Sustainable cash flow is the foundation of practice value.

A start-up that is constantly short of cash may cut the very activities that create value. It may underinvest in staff, marketing, technology, inventory, and patient experience. This can slow revenue growth and reduce future value.

By contrast, a properly capitalized practice can build systems, retain staff, create patient loyalty, and develop recurring revenue. Over time, these factors support enterprise value.

Real-Life Example: Two Start-Up Practices

Consider two doctors opening similar start-up practices in comparable markets.

Doctor A borrows enough to cover equipment, buildout, signage, and inventory, but does not include meaningful working capital. The practice opens with limited cash. When patient volume grows more slowly than expected, the doctor cuts marketing, delays hiring a technician, limits frame purchases, and begins using a credit card for operating expenses. The practice survives, but growth is slower and the doctor is under constant financial stress.

Doctor B borrows a larger but more complete amount that includes working capital for payroll, marketing, insurance, software, professional fees, and operating reserves. Patient volume also grows more slowly than projected, but the practice continues marketing, maintains appropriate staffing, trains employees, and protects patient experience. Doctor B has more debt, but also has enough runway to execute the plan.

The stronger loan structure may be the one that included adequate working capital, not necessarily the smaller loan.

Summary

Working capital is one of the most important components of start-up optometry financing. It is the financial cushion that supports the practice while patient volume develops, insurance credentialing is completed, staff are trained, marketing gains traction, and operations stabilize.

A start-up practice usually does not generate enough revenue immediately to cover all expenses. Rent, payroll, utilities, software, insurance, supplies, marketing, loan payments, vendor bills, and professional fees continue even when the schedule is not full. Working capital bridges the gap between opening day and financial stability.

Without adequate working capital, owners may be forced to reduce marketing, understaff the office, delay inventory purchases, postpone equipment needs, stretch vendor payments, or use personal credit to support the business. These decisions may conserve cash temporarily, but they can weaken growth and patient experience.

Working capital should be planned, documented, and protected. It should be based on realistic projections, expected operating expenses, ramp-up timing, owner compensation needs, and contingency planning. The amount needed depends on the market, practice size, rent, staffing model, payer mix, equipment debt, and growth assumptions.

From a lender’s perspective, adequate working capital reduces risk because it increases the borrower’s ability to execute the business plan. A larger loan that includes sufficient working capital may be stronger than a smaller loan that leaves the practice underfunded.

For private practice owners, the lesson is simple: working capital is not a sign of weakness. It is a sign of planning. It gives the practice time, flexibility, and stability during its most vulnerable stage. For start-up optometry practices, working capital is not optional. It is foundational.

Vision One Credit Union has been serving private practice optometrists since 1951 reinvesting over $500 million into private practices nationwide.

If you have any questions regarding this information or would like our feedback or assistance in reviewing your agreement, please feel free to contact Ken Ferreira, Chief Executive Officer and certified practice appraiser at kferreira@visionone.org. 

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