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The best way to determine whether your project is affordable is to develop a cost projection covering all purchases and improvements and broken down into monthly payments. An initial cost projection is designed to give you a general idea of where your funds will be spent, whether you can truly afford your project as planned, and where you might make modifications to your plan to make it more realistic for your budget if necessary. Once you have a cost projection that is feasible for your budget, you can finalize your design plans.

Figure 2.3 is a simplified cost projection for building a four-operatory, 2,000 square foot expansion. (Your project may be larger or smaller, and actual costs will vary accordingly.)

FIGURE 2.3: SAMPLE COST PROJECTION — PRACTICE EXPANSION (LEASEHOLD)

An initial cost projection is designed to give you a general idea of where your funds will be spent, whether you can truly afford your project as planned, and where you might make modifications to your plan to make it more realistic for your budget if necessary.

To be of maximum value to you and your lender, eventually you will need to generate a more detailed projection that includes project estimates from your architect, designer and contractor, as well as equipment costs, supply allowance, working capital, moving expenses, signage costs, telephone and computer expenses, and furnishings. Have your accountant review all costs before submitting your projections to your lender for a final loan commitment.

Now that you have an idea of what your project will cost per month, how do you determine whether your practice can absorb this amount of debt? For this you need to generate a debt service calculation, outlined in Figure 2.4:

FIGURE 2.4: SAMPLE DEBT SERVICE CALCULATION

If your debt service ratio is 1.25:1.00 or higher, your practice should be able to generate adequate cash flow to cover your new practice debt. However, be sure to speak with your financial advisor to determine whether your particular circumstances allow you to safely take on the amount of debt your project would require.