Your business plan is almost ready to present to the banks. Your pro forma, start-up costs, and loan narrative are complete. Final step is to let the banks know about your personal financial situation and your spending habits. Banks will want to know whether you eat off the dollar menu at McDonalds every day or if you have a $50 a day coke habit. Obviously, the latter would make you a much higher default risk, even after removing the fact that cocaine in itself messes you up pretty bad.
At the end of the day, your salary is also a business expense, and will ultimately affect your cash flow. Hence, it is crucial to budget your living expenses properly during your startup phase so that you can maximize the chances of your practice surviving.
Up until the end of residency, I had lived a college student’s life, albeit a relatively luxurious one. I was single, and didn’t have many financial obligations. I didn’t have a mortgage, car payments, children, alimony, child support, etc. I had no credit card debt, and only had $500 in monthly student loan payments (30 year graduated repayment plan).
As a resident, I took home about $3,200 per calendar month after taxes. I was more than happy with my $53,000 annual PGY4 salary. My quality of life would not have been any different had I made more. Although I had a decent safety blanket in savings, I rarely needed to tap into it.
I had planned to live similarly, if not more frugally, as I worked toward opening my practice. If I had taken a normal attending physician’s salary, it would have decreased my chances of creating a viable practice. The less I spent on my living expenses, the more I could safely spend on my practice. Besides, there’s no point in paying myself more with borrowed money.
So, how did I estimate my living expense budget for the bank? I have always kept a detailed account of ALL my daily expenses and monthly bills. I used these numbers to estimate my personal budget. The only added expense after residency was going to be health insurance. I also tried to cut frivolous entertainment costs as well. In the end, I budgeted my expenses to be $3,000 a month: $1,100 for rent, $400 for insurance (auto, disability, health), $500 for student loan repayment, and everything else for life.
If you still haven’t decided to take the plunge yet, and are still only exploring solo practice as an option, I strongly urge you to start keeping track of your monthly living expenses, and try to start reducing any extraneous costs.
Living on a minimum budget was quite an interesting experience. I was either eating generic Target brand blueberry cinnamon toast crunch cereal at $2.22 a box or ordering off the dollar menu at McDonald’s. I cancelled my internet, and used either my apartment complex’s business center computer or wi-fi at a nearby donut shop while indulging on my $2 donut for dinner. I rarely ate out unless I was meeting an equipment vendor who would buy me a free meal. Costco’s $1.50 hot dog was my friend. Although I didn’t do it myself, I recommend getting friendly with your local drug rep as soon as possible so that you can get invited to as many drug dinners as possible. Usually, you get enough leftover food to take home for another meal! Oh yeah, it’s also a great opportunity to get plugged in to the drug companies’ system for getting samples, and also to introduce yourself to fellow ophthalmologists in the area. I particularly remember going to Walmart to buy a broadcast antenna for $20 because I really wanted to watch American Idol. The signal was pretty bad, but I still got to watch it! LOL. Ironically, I had six figures in my checking account, but could barely touch any of it. Like diabetes, I was starving in the midst of plenty.
Last thing: since your living expense budget will be in post-tax dollars, you need to convert it back into pre-tax dollars when incorporating it into your business plan. You also have to set aside an additional 7.65% for the employer portion of FICA taxes.
Personal Financial Statement
The final piece of information you will need for your business plan is your personal financial statement. You will enter all your assets and liabilities, and calculate your net worth.
You can obtain a template from pretty much any bank. You can also find spreadsheet online like this one: Personal Financial Statement
Actually, this is the final item. Most banks will want to see two years worth of income tax returns. So, you’ll need to get those copies ready. Also, if you worked as an associate in the past, you might need to present the financials from your prior or soon-to-be prior practice, if you can obtain it.
Now that your business plan is complete, time to get PAID!