Imagine: Your dental practice is exceeding your expectations. New patients arrive every other day, and you’ve even had to hire two new hygienists to handle the workload. Expansion seems to be the logical choice, or it might be better to spend the money on new equipment so you can offer cosmetic dental procedures. How can you accurately determine the best course of action? That’s when a pro forma analysis is vital to the success of your practice.
Pro forma is a Latin term which means “for the sake of form,” however, this definition gives very little insight into what pro forma analysis actually is. A pro forma analysis is a financial statement of non-recurring, extraordinary items. Suppose you renovated your office this year. This is not a typical expense that occurs every year. Another example is if there is an uncommon accounting mistake that shows your practice made less than actually anticipated.
Pro forma analysis isn’t always “bad news.” Perhaps you earned income from the sale of equipment. Since you obviously don’t sell equipment every year, the pro forma analysis will show your bottom line for a year where you didn’t sell anything.
There’s another advantage to a pro forma analysis: It allows you to create a financial statement based upon assumptions and projections. Want to see what your bottom line looks like if you hire five new employees? An analysis will enable you to crunch the numbers to give a reasonable estimate. Investors and lenders typically want to see a pro forma analysis before they decide to support a business.
In short, the pro forma analysis is the go / no-go standard for making solid business decisions.
There are several factors that should be considered when developing a pro forma analysis for your practice. These factors include:
DEFINING WHAT NEEDS TO BE DONE IN QUANTIFIABLE TERMS
“Adding more employees” is not specific enough for a pro forma analysis. “Adding five employees at $30,000 a year each in the third quarter” provides a more specific groundwork to provide the best estimate.
PREPARING FOR CHANGES IN HEALTH CARE
There have been a lot of changes in health care over the past ten years. This analysis allows you to evaluate the pros and cons of these changes and prepare accordingly.
EXAMINING SUPPLY AND DEMAND IN YOUR TARGET MARKET
Is another dental practice being built near you? Is a popular dentist retiring? Projecting the direction of the local economy can help you make solid decisions now.
Another important fact about a pro forma analysis: there are strict accounting guidelines they must follow in order to comply with laws and standard practices. For this, and many other reasons, a pro forma analysis may be best left to a practice advisor who has extensive experience working with medical practices.