Health & Fitness
A Primer for Professionals Entering Private Practice
In this article we will explore the basics of establishing a private practice and introduce a new metric to evaluate the overhead costs of doing business; the "client contact hour".
In this article we will explore the basics of establishing a private practice and introduce a new metric to evaluate the overhead costs of doing business; the “client contact hour”. Whether you are an attorney, architect, consultant, mental health professional or technical specialist; we all have spent years in school and in various internships, residencies or post-doctoral appointments earning our practicum hours. All that before we formally entered the workforce. What all that experience didn’t train us for, is how to start and manage a business!
Private practice is both a risky and rewarding adventure. The rewards being that a successful private practice allows the practitioner flexible scheduling and above market compensation. The risks are over-leveraging financial resources and under-estimating the costs and effort involved. How should a professional evaluate the risks and rewards before plunging in? I will attempt to answer that question.
As with any endeavor, one must start with a plan; so let’s examine a basic outline of a business plan.
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Identify the market
Who are my clients?
Where are my clients?
What separates me from the competition?
Inflexible costs
Licensing
Insurance
Continuing education
Overhead costs
Location
Utilities
Labor
Taxes
Financial resources available to execute the plan
Expected returns
End plan
Market Research
To use a fishing analogy; fish where the fish are! You can have the best setup, but if you lack clientele the business will not succeed. So understanding the market and your value in that market are the key considerations that must be satisfied before jumping in. Make a list of what separates you from your competition. This list will come in handy when you start developing a marketing strategy. Once you’ve answered this to your satisfaction, then you can move on to consider the costs of your private practice.
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Inflexible Costs
Here a distinction is made between “Inflexible costs” and “Overhead costs”; in that, inflexible cost are those that you will pay to regardless of where you locate your business, or how lavish or lean you chose to execute your business plan. Inflexible costs include licensing costs (state/local/professional board), Insurance for your business (against malpractice), and continuing education (if needed). These are fixed whether you are an attorney, architect, engineer, management consultant or mental health professional.
Overhead Costs
These are the costs that you can manage! Basically these costs boil down to: Where you chose do business (location). What type of professional atmosphere you present to your clients. What infrastructure you desire to support your business (labor). What amenities you offer your clients (utilities). This is true of any private practice regardless of discipline. A useful metric to evaluate the overhead cost, is the ratio of “overhead cost” divided by billable client hours. Let’s call this ratio the client contact hour:
Client Contact Hour = Monthly Overhead costs/ Monthly billable hours
We will come back to this metric later with a worked example.
Taxes
In all cases taxes are levied on the profits of your business. That is only the difference between your gross revenues less the sum of all your allowable costs can be taxed. Taxes are dependent on your business activities and can only be calculated after you’ve understood the cost of doing business. Another important factor is the form of business organization that you’ve elected. For different income and cost profiles, different business structures may be beneficial (Sole proprietorship, LLC, LLP, sub-chapter-S corp.). You should happily spend the 2 hours with a CPA to determine which is right for you.
Financial resources available to execute the plan
Now that you’ve done your market research, and have an idea of how much it’ll cost you to conduct your business, you can now figure out if you are ready to enter private practice! Take the simple assumption that you will have NO billable hours for the first 6 months of your private practice. That’s right; what do your calculations show your expenditures to be for 6 months of sustaining your practice? If you can commit this sum to your start-up fund, then you have a very good chance of building a successful private practice!
Expected returns
This is the sticky part! Make a reasonable forecast of how many billable hours you think you can acquire on a monthly basis. Take these hours and multiply it with the difference of your hourly fee and your client contact hour, and subtract out 1/12th of your inflexible costs. If this number is greater than what you would be satisfied with as an employee, then you are ready for private practice. Here, optimism is not your friend.
Business plans are simple. Correct evaluation of market conditions and costs are not so simple. To fully illustrate the role of overhead cost in the evaluation; I will offer an example utilizing the Client Contact Hour metric:
Location is everything! As a professional you want to serve your clients where they are, and dependent on your profession, you want to be where you clients want to be. An attorney, architect or engineering consultant may do the bulk of their work at home; though it’s probably not advisable to meet clients at home. Some mental health professionals meet clients at home, but should they? A professional in private practice needs to present a professional presence to his clients. This means an office is needed. Depending on where this office is located in San Diego County it can range from $2.00/sf (North County inland) to $4.00/sf (Coastal San Diego) for a bare office. For a reasonably roomy bare office of 240 sf (a 15ft x 16ft box) the professional can see a monthly cost of $480 to $960.
Labor is what you will have to pay if you need someone to answer the phone(s), schedule your meetings, or greet your clients. Less visibly, it is also necessary to pay for housekeeping to maintain the office. Many professionals in private practice bypass this by greeting and attending to their own clients, but how many provide their own janitorial service? Let us assume the professional chooses to forgo such services and saves between $200/month (for an answering service) to $1800/month (employing a full time receptionist).
Utilities in this discussion encompass the costs of office supplies, phone, power, water, internet connectivity. Depending on the size of the office, these costs may account for another $200 to $250 per month. If the professional chooses to present her clients with the amenities of coffee/tea/water/Kleenex, add another $50 per month. So a professional newly in private practice who is keeping an office in coastal San Diego without added labor cost, but providing her clients with basic amenities will expect an overhead cost of ($960 + $250 + $50 =) $1260 per month.
Given 20 billable hours per month this would result in a Client Contact Hour of $63. At 80 billable hours per month, the Client Contact Hour would drop to $15.75. Quite the difference!
Yet whether you achieve 80 hours or more of monthly billable hours or hover around 20 billable hours a month. Your monthly overhead costs remain constant at $1260 (until the next rate hike). Now if you want to present the best professional profile to your clients by having a receptionist, a waiting area; then the costs will quickly mount.
So the key to controlling your overhead costs is to understand what your client contact hour is, and to find solutions to minimize it. One solution is to acquire more billable hours! This however is not so simple, and is not fully in your control. The more mundane, but effective solution is to find office solutions that minimize your out of pocket costs.
Traditional solutions are to share or sublet an office, yet there are problems inherent with each of these approaches. Subletting can raise a host of legal liabilities from as mundane as the landlord not permitting sublet leases to the specter of one party not performing on either the sublease or the master lease. Sharing office space requires all parties to keep to a set schedule of office usage, limiting the flexibility to schedule clients. In both cases, who is responsible for housekeeping or worse case; who is responsible for simple liability insurance (client suffers an injury at the office)?
All these issues cloud the calculation of cost, and must be carefully weighed to determine the soundness of the business plan.
There are less traditional solutions now available to the professional for managing these costs. It does require the professional to see the utility of an office not as a real estate proposition, but as a business to business service. For completeness of discussion, two models of such business to business services are presented here: (1) the virtual office, (2) the shared resource space.
The virtual office
Typically this is a service that provides a mailbox or mailstop with a local telephone number that is either voicemail serviced, or for an additional fee, serviced during business hours by a receptionist. Wi-Fi is usually offered, but the professional should understand the security issues with open networks before jumping in. The professional can package a number of hours to use a furnished office at the location. Typical office usage is usually billed at a 4 hour per occurrence minimum. Some few providers allow a 2 hour minimum, with a 24 hour prior use reservation rule. For San Diego the typical package that includes 32 hours (8- 4 hour occurrences) of office usage run ~ $400 per month, with additional hours available for purchase. Some providers differentiate between office usage (included in the package) and conference room usage. If you are a professional that host large groups often, then this is an important consideration. Be wary of the extra charges that may apply (i.e photocopying and fax service are useful, but do you really need it at $1 per page?). Some virtual office providers include everything, but you have to look carefully to find them. The author knows of only one, (shameless self promotion) and that is The La Jolla Professional Building, in La Jolla.
The shared resource space
These are also known as co-working spaces, and are typically open spaces where Wi-Fi is available and each cubicle is serviced by a local phone number with mail handling at the physical address. Again a live receptionist can be had for additional cost. Costs of these shared spaces are comparable to virtual office services. The mingled work space is conducive to collaborations for those professionals who benefit from it.
For mental health professionals there is a unique shared resource space in La Jolla; The Counseling Clinics of La Jolla. Their service menu provides many features specific to mental health professionals from separate client and practitioner exits, to an expressive therapy room. The cost of their services are based on the client contact hour concept and range depending on the professionals’ usage profile from $25/hr for walk-ins to monthly plans (40+ hours) that drop the cost to $15/hr.
Which of these cost management options are suitable for you? Well let’s look at your client contact hour!