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Building BLOCKSA guide to running your own business

Building BlocksA guide to running your own business

www.australiandoctor.com.au

Australian Doctor Editor – Dr Kerri Parnell

Author - John Kron

Building Blocks Editor – Cheree Corbin

Creative Director – Julie Coughlan

Photo Editor – Liz Hind

Sales Manager – Bryn McGeever

Production Coordinator– Eve Allen

The views expressed in this publication are not necessarily those of Cirrus Media. Building Blocks is an independent publication serving the needs of Australia’s general practitioners. Building Blocks is published by Cirrus Media, Tower 2, Level 3, 475 Victoria Avenue Locked Bag 2999

Chatswood DC NSW 2067 Ph: (02) 9422 2999 Fax: (02) 9422 2800 Web: australiandoctor.com.au

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© Copyright 2013 by Cirrus Media www.cirrusmedia.com.au

IntroductionSetting up your own practice can feel like an enormous endeavour. In this supplement, we break it down into smaller, more manageable steps.

From how to go about writing a business plan, to marketing in traditional and social media, to thinking about the design of your building and getting the most out of your potential employees, we look at all the challenges you might encounter if you’re thinking about stepping out on your own.

Go ahead, take the plunge.

Contents

3 Introduction

4 Taking the plunge

7 Piecing it together

10 All systems go

13 Let’s get physical

16 The personnel touch

Alternatively, a group practice can provide benefits such as having in-house CPD, but then you need to be prepared to deal with the potential for professional conflict. The number of GPs also determines critical economic cut-off points that may influence the business plan goals.

“At two FTEs, you can run the practice yourself and just have a receptionist, whereas hiring a prac-tice manager will negatively impact on profits,” Dr Tye says. “But by five FTEs, you generate enough grunt to hire a full-time practice manager who can be gutsy enough to do all the hard work and make the hard decisions required for a profitable practice.

“From five FTEs onwards, you can bring in pathology and generate income from their rent. Then at 10 FTEs, there is enough turnover to bring in allied health such as a physiotherapist and dietitian.”

The decisions you make about this and other aspects of your new practice always come back to your vision and your goals for striking out on your own. Figuring out exactly what you want is the first step to getting there.

WEB RESOURCESMedfin www.medfin.com.auMaus www.maus.com.auMaus ebook www.maus.com/Ebooks/EB_BusinessPlan/BusinessPlan.html?id=18RACGP Toolkit www.racgp.org.au/publications/tools

Piecing it togetherWorking out the finances of setting up a brand-new general practice can seem daunting. But think of as a jigsaw puzzle — a task most easily achieved by sorting all the pieces into separate piles.

For our purposes, the piles look a bit like this:1. Working capital and cashflow.2. Equipment and other assets.3. Buying the building that houses the practice.4. Tax and business structure.Included in working capital and cashflow are staff wages. These will have to be paid from the start,

before enough income can be generated from seeing patients to pay the wages.This negative cash flow usually only lasts for up to six months in the current climate of GP short-

age, but nevertheless another financial source needs to be in place in the meantime. Other similar outlays are the ongoing expenses of office and medical supplies, utilities and marketing.

All the pieces in each pile can be put together and all these piles can be connected to produce the whole financial picture so that on day one, when the doors to the new practice are opened, the financ-es will be in the right place and you’ll be ready to go.

Big pictureMany pieces of the new practice financial puzzle are fairly straightforward, for example, equipment such as a vaccines refrigerator: after choosing a model, this involves finding the best price, then pay-ing for it through a loan. Other puzzle pieces are more a little complex.

It might seem reasonable, for example, that the solution to a negative cashflow for a GP with cash in the bank is to use that cash to pay for staff wages. However, using borrowed money from a loan is the better choice, says Terry McMaster, a solicitor and accountant, and owner of McMasters’ Ac-counting Services.

“You should use your cash to pay off your home loan. Borrowing money to set up a new practice can be a tax deduction, whereas home loan repayments can’t, so it’s a more effective way to reduce your overall tax,” he says.

Once the decision to borrow money is made, the next question is: Which lender should you go to for a loan? Fortunately, GPs don’t find it difficult to get loans for a new practice because they are con-sidered low risk, so all lenders are potential candidates, Mr McMaster says.

“The best advice is to go to a single lender to avoid duplicating the administrative process, and if you are a solo GP, it is easier to go with the institution you are already with for your home loan,” he says.

“However, if you are a group of GPs, go with a different institution to the one the GPs are with to avoid the bank charging higher interest rates if one of the GPs defaults on any of their other loans such as their own home loan.”

Shopping around for the best lender is generally advisable, but GPs are likely find the institutions that specialise in medical finance tend to offer the best terms and conditions “because they are more familiar with the risk involved”, Mr McMaster says.

TIPThe business structure for your new practice will either be as sole trader

(or self-employed), a company or a trust fund.

Business structureAnother complex puzzle piece is the business structure for the new practice. There are three choices available: sole trader/self-employed, company or trust fund.

“The best advice is to set up as a trust-based structure. The other two alternatives are less tax effi-cient and not as simple to operate,” Mr McMaster says.

“Trusts work best when the practice is a business for income tax purposes. The trust’s net income can be legitimately distributed between the beneficiaries of the trust, normally family members.”

For example, a net income of $74,000 at the 30% marginal tax rate means a total annual tax bill of $15,750. But split the income between two people — $37,000 each — and the tax is paid at the 15% marginal tax rate, which equals $4650 each for a total tax bill of $9300. That’s a savings of $6450.

“It should be added that trust-based structures are supported by previous tax commissioner rulings and are the most common structure for businesses in Australia — not just for doctors,” Mr McMaster says.

InsuranceOf course, medical indemnity insurance is required for medical registration purposes. After that, it all depends on what your risks are and what you need security for, says Dr David Tye, who has success-fully set up two new practices in Adelaide and Brisbane.

At a basic level there is building insurance, if you own the building, and building contents insurance for both owners and those leasing. After that, there is a long list of products including disability insur-ance, income protection and more.

“For example, if your area is a natural disaster risk, you might consider business interruption insur-ance to pay for moving to a new building, fitting it out, contacting patients and paying wages,” says Dr Tye.

However, Mr McMaster cautions against being overinsured.“Insurance premiums will hopefully be a waste of money because those things won’t happen. You

also should be sceptical of the hard sell from insurance agents who are usually on a commission for products sold,” he says.

Government assistanceGovernment assistance is available for setting up a new practice, but only when relocating to an area of need. This includes the Rural Relocation Incentive Grant, which is for moving from a major city and varies according to areas of remoteness.It is valued from $15,000- $120,000. Another grant is the More Doctors for Outer Metropolitan Are-as Relocation Incentive Grant, for moving from the inner city, valued at up to $40,000.

ALL accountants and commercial lawyers should have the required skills to set up the tax and business structure for a new practice.

However, like a complex and challenging medical presentation where it probably pays to see a specialist, a professional with good experience in medical practices is preferable, says Paul Nadge, SA state manager at medical finance specialist Medfin.

“This should be done at the earliest opportunity. Planning, or lack thereof, is often the difference between early success or pain. A good accountant or firm will do more than manage your tax return, business activity statement lodgements and the like.

“They should be able to assist you at the planning stage and grow with you as your practice and personal situation grows,” he says.

Accounting and legal matters

Building — buy or lease?The conventional wisdom is that rent is wasted money and buying is better because it provides an asset and there are tax benefits, says David Dahm, CEO of accounting and practice management con-sultancy firm Health and Life.“If you set up a self-managed superannuation fund, it can be the owner of the property so that your repayment of loans is taxed at the lower rate [of] a superannuation fund,” Mr Dahm says.“However, buying a property does involve some risk. For example, several GPs working for you may suddenly decide to leave to another practice, leaving you in the lurch with a white elephant,” he says.“More important than the property is the practice, because without the practice, the ... property is worth a lot less. So if you’re a doctor with limited time and financial resources, perhaps you should put the main effort into developing the practice and worry about buying later,” he says.“You should purely regard buying or leasing as a property investment decision determined by the market conditions of the area you’re setting up in,” Dr Tye says. “So if the lease costs are less than buying, and there is little prospect of property capital gains in the short to medium term, then it makes sense to lease. But if the costs of leasing and buying are similar — even if the only prospect of capital gains is long term — it makes sense to buy,” he says.“However, the bottom line is that if it seems too hard, it’s reasonable to lease for the first few years and decide whether to buy later.”

Financing the buildingBuying the building for a practice will require a commercial property loan, which usually has tough-er terms and conditions compared with a home loan. The loan should be obtained from a lender as guided by the earlier advice.“With leasing, you will need to find a financial source for the payments, along with other ongoing expenses, until the cashflow becomes positive,” Dr Tye says.“However, one other way of reducing this initial burden is to negotiate a rent-free period with the owner. Up to six months is reasonable in the current economy. Once your income flow improves, you’ll be able to cover the lease payments.”

TIPThe two main medical finance specialists in Australia are Medfin, now owned

by NAB, and Investec, previously Experien.

Working capital and cashflowAlong with building lease payments and loan repayments, working capital is required for ongoing expenses, including staff wages, utilities (including electricity, water and phone, office and medical supplies), advertising, and insurance premiums, says Paul Nadge, SA state manager at Medfin.

“It is important to have a budget that is realistic. It not only needs to include all expenses and income, but importantly the timing of such. The GP will also need to take into account personal ex-penditure items such as home loan, school fees and personal living expenses,” Mr Nadge says.

“Overestimate if necessary and ensure within your budget planning you have the necessary reserves

in place to cover all payments pending receipt of all income,” he says.Mr McMaster says setting up finance for working capital is relatively easy. “It is usually provided

by a lender as a line of credit or draw-down facility, which is attached to your existing home loan or new commercial property loan, depending on which is relevant and at the lowest rate for you.”

Equipment and other costsThese are the last pieces of the puzzle and include the IT system; systems for covering medical re-cords, appointments and billing; medical equipment, like vaccine refrigerators; and marketing such as signage and a website. Once the costs have been determined, a single lender can usually provide a loan for these.

WEB RESOURCESMedfinwww.medfin.com.au

Investecwww.investec.com.au

Rural Relocation Incentive Grantwww.medicareaustralia.gov.au/provider/patients/rural-programs/general-practice/relocation-incentive.jsp

More Doctors for Outer Metropolitan Areas Relocation Incentive Grantwww.health.gov.au/outermetro

All systems go Once you’ve developed your business plan and done your financial plan, the next step in setting up your new practice is getting the systems right. A system can be defined as a set of components forming a complex whole. It’s commonly used to describe computer systems, but it’s a useful way to look at your new practice as well.

Running with the computer system theme, a new practice could be described as having a front end and a back end. The front end is made up of the processes and activities that directly involve the pa-tient, such as a consultation, making an appointment or processing an account. The back end involves those processes and activities that support the practice, without direct patient contact such as soft-ware, payment processing, education and training.

Front and back ends work separately but require integration and plenty of planning to get them right. Let’s start at the back.

TIPAbout one-third of your daily appointments will be taken up with urgent

con ditions and two-thirds will be for routine presentations.