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Tuesday, April 08, 2008

A reader question: How long to positive cash flow in start-up?

One of my readers (not my mom) asked me a question that deserves an answer. Hopefully, she will read this post.
The question was:

When does the
cash-flow usually come in after starting a practice?



Answer: Depends

Medical practice is a business and start-up is start-up. Most start-ups will fail in the first year for one simple reason; they run out of money before cash flow can cover expenses. When these businesses will run out of money depends on a variety of factors. The most important factors are access to capital, type of business, competition, and payer mix. Business that start-out with less than $5000 cash will usually fail in the first year, while those that have access to $100,000 or greater, will most likely live beyond their one year anniversary. If you want to survive, I recommend raising money, and lot's-o-it.

The type of practice you have makes a difference as well. Some practice's have inherently high start-up costs while others can be started with significantly less money. For example, I started my urology practice with $40,000 down and access to $150,000 in case the unowhat hit the fan. An internist may be able to start-up for even less, while an OB-Gyn in NY will need in excess of $200,000 to start-up. But the start-up costs only tell part of the story. A urologist may have high costs compared to an internist, but we also have higher revenue potential. A plastic surgeon or dermatologist in start-up can have very low up-front costs yet have a high earning potential and could thus become cash positive in a very short time. Contrast that to a primary care physician: they'll have relatively low initial costs but very little real income generation potential in today's climate. Plus, as they get busier, their costs escalate much faster than their revenue.

The third factor is competition. If you are the only urologist in town, you'll do well. If you are like me, one of 100s, you'll have to struggle a bit more to make money. A plastic surgeon in start-up on Long Island may have lower costs than, say, I did, but he/she has much fiercer competition than I faced. As for primary care; out here they are dime-a-dozen.

The fourth factor is payer mix. If your patients are insured, and you have enough of them, you'll start to make money. If you practice in a very well-off area and can go "out of network" you'll make the same money with less work and in less time. If you deal with predominantly Medicaid, you'll probably have to move because you'll never get there.

As for me,
my cash flow turned positive after 9 months of hemorrhage.

I started in April 06 with a $40,000 initial investment and was prepared to pour another $150,000 of my own money into the practice to "float it" in a worse case scenario. Initially I estimated a loss of $30-50K in year one and a break even point by end of year 2. I felt that by end of year three I'd start to make in excess of $100K per year. In actuality, I broke even by end of year one and made a modest, yet respectable, profit by end of year 2. This year I have been doing quite well. While I had to dip into my savings, I repaid those loans quickly.

Caveat:

While I have already recovered my initial investment and have been making some money, I am still greater than $200,000 in the hole if you factor in loss of income during my first 2+ years of start-up compared to what I'd have earned had I stayed an employee. So be forewarned: the freedom to be your own boss comes at great cost.

So good luck Rose and please feel free to contact me.

The IU.