Pro Forma Part 3: Putting It All Together

Following up on Pro Forma Part 1: Revenue Projections and Pro Forma Part 2: Operating Expense Projections, we will conclude our series on creating the pro forma.

Monthly Revenue Projections

Estimating revenue projections is a bit tricky in our profession because we don’t get paid immediately for our services. Different insurance payors process their claims at different rates. Based on what I heard from my mentors and consultant, I originally expected my claims to take 1 to 3 months to clear. However, most claims actually pay within 1 month, especially if you sign up for EFT payments.  And in fact, there is absolutely no reason why you shouldn’t sign up for EFT. Currently, 60% of my claims get paid in full by 1 month, 90% by 2 months, 95% by 3 months, and 99% by 6 months.

Here’s the timeline for my current payors:

  • Medicare: 14 days
  • Anthem Blue Cross: 3-14 days
  • Cigna: 7-14 days
  • Blue Shield of California: 3-4 weeks
  • UnitedHealthcare: 3-4 weeks
  • Healthnet: 1 month
  • Aetna: 1 month
  • Local Medicare Advantage IPAs: 2-6 weeks
  • Miscellaneous: 1 to 2 months

By the way, don’t pay attention to the collection rate of your gross charges. It’s a pretty worthless number. If you charge close to insurance companies’ fee schedules, then your collection rate will be 90%+, but if you charge $5,000 for an office visit, your collection rate will be 5% for the same claim. Insurance companies will pay according to their fee schedule no matter how much you charge, and they will force you to write off the rest.

What’s more important is the collection rate of your ALLOWABLE charges. This figure actually tells you how much real money you’re leaving on the table. My collection rate of allowable charges is close to 99%. No matter what you do, it will be near impossible to collect 100% of your allowable charges. You will inevitably lose some charges to coding errors, delayed or missed submissions, deadbeat patients, etc.

Monthly Operating Expenses

You will pay most expenses on a monthly basis, but some require lump sum annual payments (hospital dues, malpractice insurance, liability insurance, workmen’s comp insurance, property taxes, etc.). Because of this fact, your month to month expenses will not be exactly the same. However, since only a small percentage of your total expenses require a single annual payment, for the purpose of your pro forma, you can just estimate your monthly expenses by  dividing your annual estimated expenses by 12.

In regards to your equipment loan payments, you should only include your interest payments, and not your principal payments, into your operating expenses. That’s because you will already be deducting the principal through depreciation. However, since your principal payments will still reduce your checking account balance, you should include it when calculating your cashflow.

Once you complete your revenue projections and operating expense estimates, you can finally calculate your expected monthly practice income (loss), from which you would draw your salary when you eventually become profitable. Hence, you do not include your personal salary in your operating expenses.


After you finish your monthly net income projection spreadsheet, you should figure out a couple of milestones.

1. The Point of Maximum Negative Cashflow

This will be the month where you will be deepest in the red. It will also be the point where you will start to become self-sustaining on a month to month basis. This amount will be the working capital you need to ensure that your practice survives until it generates its own income. Usually, you need to set aside 3 to 4 months of operating expenses. Mine occurred at month 4, and I was down $25,000 in total.

2. Break Even Point

This will be the point where your practice becomes cashflow positive, and ultimately profitable. I originally estimated mine to occur between month 10 and 16, depending on how I tweaked my practice patterns. However, it occurred on month 8.

3. Cumulative Cashflow at the End of Year 2

Knowing this number will give you an idea of how much wiggle room you will have to expand the practice, increase your take-home pay, prematurely pay off debts, etc. In the first 2 years of practice, I made $210,000 in profit.  Close to $60,000 went toward paying off my equipment loans. So my cashflow was $150,000. Thankfully, I paid no income tax on any of it because I had $450,000 in deductions waiting for me.

Once I had finished my pro forma, my practice took on a certain definition on paper. I had a strong feel for what my practice was going to be like, and I had more confidence and reassurance that this could be done.

When presenting your business plan to banks, it is key to know your pro forma inside out. The benefit of doing your own legwork, instead of using your consultant, in generating your pro forma is that you WILL know everything about it whether you want to or not.

Now that you have completed your pro forma, we will go over creating the narrative for your business loan proposal next.

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