Examining the Budget of an Urgent Care Start-Up
Starting an urgent care from the ground up can be a daunting task for a physician owner looking to break into the model. However, before leaping into the trenches, a leader should always consider the budget of the project that they are undertaking when opening at start-up urgent care center.
Alan Ayers, Vice President, Strategic Initiatives with Practice Velocity, LLC says the first step in creating a budget is always to estimate revenues. Ayers stresses that the operating model (which determines expenses) should support the anticipated volume. Understanding volumes up front is key because an operation built anticipating 100 patients per day will look very different in terms of facility, capabilities and staffing than one anticipating 25 patients per day, he says.
“Patient volume will determine the scale for fixed expenses (i.e. what size of facility, type and quantity of equipment needed, and number of staff/staff positions required). Building an operation with capacity to support 100 patients per day when only 25 patients are expected would result in unnecessarily high overhead that could keep the center from ever being profitable,” Ayers says.
“For urgent care, revenue is equal to the number of patients anticipated times the average charge, minus any refunds, contractual allowances, and bad debt expense. Average charges can be derived from industry bench-marking data and by understanding rates charged by other providers in the market.”
Ayers says urgent care is a volume-driven business and once there is sufficient patient revenue to cover the center’s fixed costs, each additional visit contributes directly to the center’s bottom line.
“That’s why the most profitable urgent care centers are generally those with the highest volumes. Because rates in urgent care are often set by third party payers, volume is the most significant factor in computing revenue. Volume is generally a function of a trade area’s population density and demographic make-up. For an urgent care start-up, it’s important to show a gradual ramp up in volume, based on the season of opening, the extent of pre- and post-opening marketing activities, the status of payer contracts, and the historical ramp-up of similarly positioned centers. Generally a center should plan on achieving break-even volume, which is generally 25 patients per day, within 12-18 months of opening,” he says.
Bruce Irwin, MD, CEO of America Family Care says that the first steps an owner should take when planning a budget for an urgent care start up varies with who the future owner is to be; a provider, a hospital, or investor.
“It could be an ER doc or a family practitioner that wants to get into the urgent care business; it could also be a skilled group of private equity people or a hospital. The answer varies based on the ultimate goal of the future owner,” Irwin says.
“This is a really hard business. It is capital intense, labor intense and highly regulated”. However, if the thought of the business being difficult does not frighten owners away, Irwin says the first decision an owner needs to make is where do you want your center to be and how much can you afford? Picking the right location is crucial whether it is an inline rental space or a freestanding building. “The most common thing to cause an Urgent Care Center to fail is a poor location.”
“When I started my business, the first thing I developed was apro forma, a forecast of financial performance. I had no business experience and had never done a pro forma before so I got together with my accountant. We made various estimates of expenses and revenues”, Irwin says.
Some of these costs included the cost of location, basic utilities, cost of labor, cost of marketing, etc.
“Every cost that we could think of, we threw in there, and threw it in on the high side,” he says.
Irwin says, as part of the budgeting process involves examining revenue and beginning to look at the number of patients that the center could possibly see and the revenue which would be generated.
“You have got to look at how much capital you can afford to put into your center. You better err on the high side because the break even proposition of an urgent care center nowadays is probably 18 to 24 months depending on where you go,“Irwin says.
“The main thing is to pick a location very carefully, calculate what the expenses and revenue will be, and then plan on being able to hang in there for 18 to 24 months. Also, depending on your location, you need to plan a significant amount of money for marketing.”
Ayers says that utilizing a consultant in this initial phase of budgeting can be essential to a start-up’s success by validating that the physical location and a trade area’s demographics can actually produce the needed number of patient visits; understanding payer contracts and reimbursement rates being offered in the market; relationships with equipment, supply and services vendors to secure the best prices; and historic experience projecting volume ramp-up curves.
“Typically budgets are created for an operating year. Throughout the operating year, the budget is then compared to actual results to determine performance variances, or to pinpoint revenue and/or expense items that require management attention. For a start-up urgent care, generally $1 million in start-up capital is needed to fund the build-out of the clinical facility; purchase furniture, fixtures and equipment; purchase initial supply inventories; to fund legal and consulting fees in organizing the practice; and to cover operating losses until the center breaks even. This start-up capital may come from a combination of bank loans and equity investments by the business owners,” Ayers says.
Initial capital expenditures consume cash but are taken as expenses over time in the form of “depreciation.” According to Ayers, debt service on that capex, however, comes directly out of working capital. So the situation may exist that the cash leaving the business is greater than any operating losses shown on the Income Statement. In addition, while revenue may be booked immediately, due to Accounts Receivable, there may be a lag of 30-60 days or longer before any cash is collected. You can’t pay expenses with receivables, so in addition to budgeting a Profit & Loss it’s important to also budget a Statement of Cash Flows to understand exactly what cash is coming in, and how that cash will be used, at various points in time.
“The number one reason urgent care centers fail is they exhaust their working capital (run out of cash) prior to achieving break-even operations. This mistake can be prevented by keeping a firm grasp on how much cash is coming in, and going out, at any given point in time,” Ayers says.
Ayers adds that budgeting always entails making assumptions, and assumptions change over time, so it’s important to document and have all stakeholders agree on how revenue and expense figures are derived. Budgetary assumptions include visit projections, reimbursement per visit, staffing levels, hourly labor costs loaded w/benefits, as well as administrative overhead. If it becomes necessary to revisit assumptions, then having documented assumptions easily available, will make it easier to adjust the budget going forward.
“For an urgent care start-up, keep in mind that due to the volume ramp-up anticipated, that expenses will ramp up over time. The number one operating expense in urgent care is labor so staffing levels (the number of FTEs for each type of position) should align with patient volumes. Generally an urgent care provider will see 3-4 patients per hour, so volume will dictate the number of providers needed. A center shouldn’t start fully-staffed on day one but should ramp up staff as volume increases. Meaning, on Day 1 when only 3-4 patients show up…the center may need only one provider and a cross-trained front/back office person. Additional staff positions should be added to coincide with the projected volume ramp-up. Cross-training (i.e. clinical support staff who can register/discharge patients at the front desk or a radiology technician who can work as a medical assistant) will enable the center to be more nible in its staffing during these initial months. In addition, a provider during the start-up phase may perform certain tasks him/herself, like giving injections or running instant lab tests, while the clinical support team is built,” Ayers says.
Unnecessary Expenses and Common Mistakes
Irwin says when considering mistakes like unnecessary expenses, there are several things that he would be very careful about, the first being staffing.
“You are going to tend to overstaff. Everybody I know that has cranked off an urgent care has overstaffed. You have got to staff according to what your expected volume is, and then cut one person out. In our business there are certain peak hours. There are times when you have got to hustle and there are times when you can relax. You cannot afford to staff all day for a few busy hours”.
You are also not going to see the patients that you think you are from an ER. You are not going to see the high degree of trauma as an ER. There is certain equipment and supplies that you probably will not need as much as you think you will. Last but not least, is under budgeting or over budgeting marketing,” Irwin says.
Financially, Ayers says many start-ups act as though the budget is just a formality for getting a bank loan, they seek to borrow someone else’s pro forma to avoid the work of creating their own, or don’t invest the appropriate time researching and documenting assumptions.
“The process of creating a budget is also the process for planning a business because budgeting entails asking and answering critical questions as to how the business will operate. Because a budget is an actual operating plan for a business, if the budget does not show a profitable or feasible business venture on paper, in all likelihood the business won’t be successful in “real life” either. Time should be spent to examine and document every assumption that goes into creating the budget, including the use of benchmarks from UCAOA, MGMA and other sources,” Ayers says.
According to Irwin, if a new owner is just building a start up, they are going to have a lot of trouble getting financing. Irwin predicts that they are going to need somewhere around three to five hundred thousand dollars available to them short of financing.
“Let’s say you go into lease space. You are going to have a certain amount of tenant improvements that the landlord will provide, usually not more than $30 to $50 per square foot. You can expect that your leasehold improvements are going to cost 100 bucks per square foot. That is the average nation-wide. If you are going into a four thousand square foot space; after landlord contribution you will still need between $200,000 and $280,000. It is unlikely anyone will finance that for you, ” Irwin says. In addition, equipment will cost between $150,000 and $200,000. However, equipment can probably be leased.
Ann Bittinger, attorney and owner of The Bittinger Law Firm says when she advises someone who wants to start a center, one of the main issues she discusses is control.
“In some ways equity financing seems like free money in that you don’t have to pay it back. However, the long-term cost of equity financing can sometimes outweigh the costs of securing debt to finance a transaction,” Bittinger says.
“Usually if you get investor financing you have to relinquish some level of control. You have to give stock to the investor, and sometimes that can be significantly more costly in terms of operations and control in the long run. I think that is especially true given today’s low interest rate environment. What we are really talking about is the dilution of control in order to get what seems like free money.”
Irwin says sources of conventional financing won’t work and owners might find an investor who will.
“Small Business loans (SBA) work for a lot of people because you can get high ratio bowering power, as high as 95 percent.Financing raw start up expense is very difficult. We recommend thatour franchisees have five hundred thousand dollars of liquidity, and net worth of at least $1.5 million,” he says.
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.