Developing a pro forma financial statement

A pro forma is a projected financial statement that helps a practice make important decisions such as bringing on a new provider, a new service line, expanding current services or opening a new location. It models the anticipated results of potential transactions and should encompass the goals of the clinical and operations team.  

The purpose of the pro forma is not to predict how much money you will make or the number of patients you will see. Rather, the pro forma is a guide to help you decide if what you are proposing will be financially viable; to help set expectations on estimated cash flow and volumes; and to determine the impact on your current operations.

The format of a pro forma financial statement is similar if not exactly like your monthly or annual financial statements that record financial activity in your practice. The difference is that a pro forma statement looks to the future; whereas, your monthly or annual financial statements record historical data.

The steps to creating a pro forma can be both linear and circular. As you follow the steps below and gather more information, you may have to circle back to your original assumptions and modify them as needed.

Member Exclusive: Pro Forma Template

Gather information

Meet with all clinical, operational and financial staff involved with the new transaction and gather as much information as possible. This is crucial to developing a sound pro forma that can be measured against actual results. Depending on the type of pro forma, the following questions should be asked:

• What is the practice trying to accomplish with this decision?
• Has a candidate or location been identified? Does the candidate have a license in your state?
• What are the expectations of all parties involved?
• Can the needs be met in any other way?
• What is the competition?
• What is the market share?
• What are the historical volumes and revenue for existing providers? Be sure to include the number of new patients seen per day, follow-up patients seen per day, average procedures performed per day or week, half days in clinic, half days in OR, on-call days, average collections per clinic, procedures, inpatient versus outpatient.
• What are expectations for on-call and impact on seeing patients in the clinic?
• Is rounding before or after clinic hours?
• Is there a volume of patients in the community to meet the need?
• What is current room utilization?
• Is there enough square footage to accommodate a new provider or service line?
• For surgical or procedural providers, is there enough dedicated OR time?
• Where are patients coming from? Has a ZIP code analysis been completed?
• What are the expected hours of work per day, days per week and weeks per year in the clinic, rounding in the hospital, or operating room time?
• Are there any ancillary services provided or offered in the clinic?
• How is physician compensation determined? Is there a compensation plan in place?
• What are the expected terms of the contract with the new provider or new location?
• Will another billing provider be included in the pro forma (for example, a nurse practitioner or a physician’s assistance?
• How long will it take for the physician, service line, clinic, etc., to be at full capacity (i.e., what is the ramp time)?

Develop assumptions

In developing assumptions, using historical data from your practice helps determine future expectations. The historical data should be augmented with benchmark data such as that provided by MGMA or other survey reports. Understanding what the pro forma is trying to accomplish will assist you in determining how much information you will need to gather.

Volume and revenue assumptions

There are key revenue assumptions when developing a pro forma. Table 1 lists simplified revenue assumptions needed for a pro forma with non-complicated revenue models. Appendix B lists the examples of assumptions needed for more complicated revenue projections. The type of specialty or physician compensation model may dictate which revenue and volume assumptions should be used. For example, a primary care practice with few procedures, ancillary services or operating room time may not need a detailed revenue model. However, an oral surgery practice with surgical procedures in the office, less intense surgical procedures in the OR and large orthognathic cases in the OR will need a more thorough revenue model.

Steady state visits (Once provider is ramped up to optimal level) = Number of half-day clinics per week times number of patients seen per half day times number of weeks per year in the clinic (e.g., 9 X 8 X 48 = 3,456 outpatient clinic visits per year).
Collections per visit = Total practice collections from all revenue sources for a given time period divided by total clinic visits for the same time period (e.g., $3,500,000 / 14,000 = $250 collections per visit).
Volume calculation = Sum of the steady state visits times the ramp for each quarter. For example, Y1 visits would be 2,160 or ((3,456 X .25) + (3,456 X .50) + (3,456 X .75) + (3,456 X 1.00)), while Y2 visits would be 3,456.
Estimated collections = Visits per year times collections per visit (e.g., Y1 would be $540,000 or 2,160 X $250 and Y2 would be $864,000 or 3,456 X $250).

Expense assumptions

Although the revenue model is crucial in developing a pro forma, the expense assumptions are just as important. Understanding your staffing needs for a new physician or new location are needed to develop a sound projection.Utilizing MGMA or other benchmark sources along with what your practice historically does is essential. Tables 2 through 4 list the assumptions needed to calculate expenses in a pro forma. Based on the specialty or geographic area, additional assumptions may be needed to properly project expenses.

Other expense assumptions including startup costs

Based on your initial meeting with the clinical, operational and financial teams, a list of items will need to be developed prior to the physician’s start date. The costs of these items should be based on historical data or from contacting outside vendors to get cost estimates. Examples of startup expenses include, enrollment fees, medical equipment, legal and accounting fees, marketing, supplies and insurance.

Physician compensation

In developing the pro forma, the practice’s physician compensation plan needs to be factored in to determine physician compensation in future years.

Putting it all together

After gathering information and developing assumptions, a pro forma can be created.  Appendix A is an example of a pro forma based on the assumptions in the tables above.

The pro forma needs to be reviewed for reasonableness in relation to volume, productivity, physician hours, clinic hours and clinic rooms.  Analyze the utilization of existing rooms and proposed rooms separately to ensure there are enough available to handle the pro forma projections.

When bringing on a new provider or opening a new space, revenue or physician compensation for existing physicians may change due to a shift in the type of patients seen (new versus established). The new provider will most likely be adding new patients to his panel who would have been seen by existing physicians. Depending on the specialty, the new to established ratio will even out over time, as well as existing physicians’ revenue and compensation.

Follow-up

Once the pro forma has been approved and the physician or new service has been employed for more than a year, compare the pro forma to the actual financial results to determine if assumptions were accurate, if the physician or new service is meeting expected volumes and to make corrective action plans if needed.