Ophthalmic practices have thousands of moving parts. Thoughtful, intentional, and especially documented decision-making is key to keeping the practice machine well-oiled.

Decisions that will impact the practice’s future are often made opportunistically, rather than by developing and following a written plan. A detailed “pro forma” can be a useful guide to help owners and administrators move beyond gut hunches and to project more closely the potential impact of your practice’s prospective actions.

This financial spreadsheet can assist you in predicting the outcome of any proposed business activity. Be the information simple or complex, a pro forma can help you assess:

• The financial impact of adding a new provider to the practice
• The likely result of adding a new service like elective plastics or hearing aids
• How the imminent retirement of a partner will impact you
• Whether it makes sense to merge with another practice
• Whether to keep or abandon a faltering satellite office
• The impact of taking on more office space in your next lease contract.

PRO FORMA IN ACTION

For a very simple example, let’s use that of Dr. Smith, a solo practitioner who is considering adding an optometrist to his practice and also planning to add two exam rooms.

A pro forma is only as good as the underlying assumptions you use to draw it up. And although your initial assumptions are often imperfect, working through this process shows you how the moving parts fit or don’t fit together.

Figure 1 is a sample pro forma that Dr. Smith is using to project the outcome of the actions he has under consideration. This sample is a very basic illustration and likely to be less elaborate than the much more complex pro formas you are likely to employ.

In this pro forma, Dr. Smith makes the following assumptions:

• Current practice has $1.1 million in collections and $715,000 in expenses
• After an initial transition period, MD revenue production will remain the same
• OD will work full time; 40 hours per week
• OD will cost the practice a total of $150,000 in wages, taxes and benefits
• OD will see 350 visits per month with an average professional fee ticket of $95 per visit
• OD will contribute $175,000 per year in optical collections
• Optical goods and labor overhead margin on the incremental sales will be 60%
• OD will require two techs, two additional clerical support staff and also $40,000 annually in general and administrative support, and in amortizing capital outlays to add two exam rooms
• Practice has a backlog of patients and will soon fill up the new doctor’s schedule.

As you can see from this simple example, if the underlying assumptions are correct, Dr. Smith stands to enjoy a 31% pay raise if he adds an optometrist.

Of course, it could take a year or longer to achieve the ultimate financial result listed in the right hand column. For a few quarters, Dr. Smith may actually take a pay cut, because of revenue lags due to credentialing delays, gradual patient volume growth and the usual front-end expenses of any expansion like this.

MONITORING CASH FLOW CHANGES

To understand how cash flow may change over time with even a simple practice project like adding a single provider, you can expand your pro forma to show not just the end-point result, but the intermediate collections, expenses and profits.

For a very long-cycle project, like opening satellites or a merger event, you may need to expand the month-by-month or quarter-by-quarter projection out to a year or longer. (For an example, see Figure 2 in the online version of this article).

Until you are comfortable with this tool, and for large impact decisions, have your accountant and other advisers work with you to tighten and expand the set of underlying assumptions.

CONCLUSION

At this point, you might notice that these pro formas, even though they are materially simplified, look a lot like an annual budget. And of course that’s what an annual budget is — merely a forecast (like the simple example for Dr. Smith) of what will happen.

Only a minority of practices generate an overall pro forma budget each year, and then use this as a disciplined comparison to actual performance. And many practices that try out annual budgeting abandon the exercise because so much can change in a year.

But, even if you don’t formally budget, try to create a pro forma spreadsheet the next time a large project surfaces. As the saying goes, “Gather the facts, and let the facts make the decision for you.” OM

Corinne Z. Wohl, MHSA, COE, is president of C. Wohl & Associates, Inc., a practice management consulting firm. Corinne earned her Master of Health Services Administration degree at The George Washington University and has over 30 years of hospital and physician practice management experience. She can be reached at czwohl@gmail.com or 609-410-2932.

John B. Pinto is president of J. Pinto & Associates, Inc., an ophthalmic practice management consulting firm established in 1979. He is the leading author in America on the business of ophthalmology. His latest book, “Simple: The Inner Game of Ophthalmic Practice Success,” is now available at www.asoa.org . He can be reached at pintoinc@aol.com or 619-223-2233.