Writing a business plan is an important early step in planning a dental practice. Whether you’re acquiring an existing practice, expanding a current practice or starting one from scratch, a business plan adds the necessary muscle to the skeleton of your idea. It also allows prospective lenders and investors to evaluate your request for funds, which is why detailed financial information is perhaps the most critical element of any business plan.
Below are five of the most important financial elements that should be included in a business plan.
- Demonstration of financial stability.When you seek practice financing, including a business plan with your request for funds demonstrates that you have a strategic focus on running the practice. A prospective lender may also obtain your credit score and copies of recent tax returns, review the practice’s cash flow (if you’re acquiring an existing practice), and ask for a list of business and personal assets and liabilities—the lender will want to ensure you will be able to repay the loan.
- Startup and operating budgets. When starting a practice from scratch, you’ll have to pay for the office space, equipment and supplies needed to get up and running. After your initial acquisition, you’ll need to estimate an operating budget. Until it’s earning enough to cover an operating budget, your practice will likely rely on other funds (like a line of credit or your personal savings) to pay the operating expenses.
- Balance sheet.This is a graphical representation of your practice’s assets, liabilities and equityat a given point in time. Through a process called articulation, the balance sheet is related to the other two major types of financial statements—income and cash flow. Including a set of forecasted financial statements demonstrates an understanding of accounting principles to lenders or investors.
- Break-even analysis.This examines various combinations of sales and fixed costsnecessary for your practice to begin earning a profit. The break-even point is the volume of sales necessary to cover your fixed and variable costs.
- Forecasted income.The income statementis one of the two financial statements that connect the period of time between two balance sheets. An income statement measures patient collections (sales), expenses and profit or loss over the reporting period. The most common length used for a full reporting period is 12 months.
Because you don’t know what your income statement will look like in the future, you have to make a forecast. Be prepared to talk through your forecast and your assumptions with prospective lenders or investors. Articulating the how and the why behind your key assumptions will demonstrate careful thought and planning on your part, and it will go a long way toward securing the money you need for your practice.
Forecasted cash flows. The cash flow statement is the other financial statement that connects the balance sheet between two points in time. The cash flow statement measures cash inflows and cash outflows from three business activities: operating, investing and financing.
While the above financial information is critical, it’s important to note that a full-fledged business plan includes other elements, including marketing, staffing, and operational strategies.
First-time dental practice owners often have great ideas and a willingness to work hard. However, a reluctance to write a business plan—or one that doesn’t include the necessary financial information—can hurt your chances of raising capital from outside sources.
This article by Kirk Dewart, BMO Harris Bank, director of U.S. Healthcare Programs, originally appeared in the May 20, 2019, New Dentist News. BMO Harris Bank is the ADA Member Advantage endorsed provider for practice financing. Call 833-276-6017 or visit bmoharris.com/dentists for more information.