Dollinger index

Marketing the New Venture 249

variable expense. The supply cost per patient has historically averaged $4.67. The total variable

cost per patient is then estimated at $5.37.

Deriving sales budgetsrequires developing a sales budget that can support the business. The

break-even sales budget is easily calculated from Exhibit A.6. Estimated monthly fixed operating

expenses are $26,350. The average patient charge at the original EMC is $37.00. Assuming the

same average charge at the new facility, each patient visit contributes $31.63 ($37 minus $5.37

variable expenses). Therefore, the facility breaks even at 833 patient visits per month

($26,350/$31.63), as seen in Exhibit 6.A.7.

This break-even computation ignores financing costs. Whatever its sources of capital, a ven-

ture must earn a rate of return. If Dr. Petrillo personally supplies all the capital, he will need a

return on his investment. If the capital is borrowed from a commercial bank or an equipment

leasing firm, revenues must cover interest expenses.

The required capital investment includes medical equipment ($51,000—Exhibit 6.A.3), office

equipment ($13,500—Exhibit 6.A.4), and nonrecurring start-up expenses ($17,729—Exhibit

6.A.5). In addition, operating expenses in the early months will exceed revenue. To establish a

reserve of three months of operating expenses will require approximately $80,000 in additional

capital. Total start-up capital is, therefore, estimated at $162,229. At a cost of capital of 18 per-

cent, the facility must generate an additional $29,201 per year ($2,433 per month) to cover its

capital costs.

Adding these considerations raises the number of patient visits to 910 a month to break even

($26,350 + $2,333)/$31.63).

Step 3. Judging Likely Market Share

Of the estimated 43,000 to 48,000 annual patient visits in the trade area, EMC must capture 23

to 25 percent to break even and cover its capital costs, and that means substantial market pene-

tration.

Direct mail advertising (pre-opening ) $ 2,300
Legal/accounting 300
Rent/utilities deposits 4,226
Prepaid malpractice insurance 3,100
Housekeeping/security services 500
Initial medical supplies inventory 3,803
Nonphysician salaries (preopening) 1,500
Sundry 2,000
$17,729

EXHIBIT 6 .A. 5 : Nonrecurring Start-Up
Expenses

EXHIBIT 6. A.6. Estimated Monthly Operat-

ing Expenses for Proposed EMC Facility

$ .70 per patient

4.67 per patient

$5.37 per patient

Legal/accounting

Manager salary

Nonphysician salaries

Physician salaries

Postage

Security/housekeeping

Telephone

Depreciationc

Sundry

Total Fixed Expenses

Variable Expenses

Malpractice Insurance

Suppliesd

Total Variable Expense

a. $1,250/month rent + $250/month average utility expense

b. Estimated at 115 percent of salaries to cover FUTA, FICA,

Workmen’s’ compensation, and state unemployment.

c. Fixed assets of $64,000—straight line, 5-year life (60 months)

d. Estimated from experience at EMC #1

200

1,600

8,050b

10,000

200

250

250

1,075

1,225

$ 26,350

(continued from preceding column)

Fixed Expenses
Advertising
Rent/utilitiesa

$ 2,000

1,500

(continued in following column)