Keeping in mind the advice provided in our previous article, ‘Taking Financial Control of Your Practice’ (page 64 – 67), we take a look at some practical ways to secure a healthy financial position for your business.
The idea of establishing your own optical practice can be as exciting as it is intimidating. To protect yourself and your business, it’s important to consider all the financial aspects of running an independent practice before you open the doors.
Prior to signing any documentation, it is essential that you consult legal and accounting professionals to determine the most appropriate legal structure for your practice – otherwise it will never operate efficiently. Some of the questions that should be asked include which entity should pay staff, which entity should hold or own assets, what insurance is required, and how a service trust can help.
Secure Your Practice Premises
Many optical professionals believe leasing their premises in an effort to lower their start-up costs is the logical way to establish a practice. However, purchasing your own practice premises can potentially be a profitable long-term investment. For one, it provides security of tenure. It also offers an investment in your own future and could be a substantial contribution to your retirement. Additionally having your own premises enables you to create a space that is appropriate for your needs – and it is unlikely you will need to incur an expensive move again.
A practice that operates without the appropriate finance structures in place can be likened to a presbyopic trying to perform close-up work without spectacles
It is possible to fund 100 per cent of your commercial premises, lock in your interest rate and, in doing so, never need to negotiate your rent with a landlord again. You can also finance your fit-out and potentially receive capital gains on your property. With a correct structure, you may be able to maximise your commercial return when you eventually sell.
Save on Your Equipment
The ‘arms and legs’ of your practice are the equipment. You can either buy your equipment outright with cash, or you can save your cash and gain commercial benefits by financing these purchases using one of a few different finance options. While financing arrangements are common, they can be complex, so it’s important to get advice from finance experts on the best solution for you. That solution will depend on the commercial benefits of the purchase and various tax structures.
For example, when buying equipment for AUD$30,000, the finance structure you choose may result in different repayment amounts, depreciation benefits and ownership, as follows:
Chattel Mortgage
With a chattel mortgage, financing AUD$30,000 for equipment over five years with no deposit and no residual at 8.5 per cent per annum means your monthly commitment is AUD$612, but you may claim the interest portion of your payment in your tax return throughout the entire loan period. After five years, your total repayment of AUD$36,720 (AUD$7,345 each year) includes a total of AUD$6,720 in interest expense, which is tax deductible, plus you may also claim equipment depreciation on the goods for the life of the asset, and not just the loan term. As a guide, the total depreciation claimed over the four years varies between AUD$23,000 and AUD$25,000 if the diminishing value depreciation method is applied. The exact depreciation amount claimed each year depends on your self-assessment, tax advice and chosen depreciation method.
Lease Structure
Alternately, if you choose a lease structure, the lease payments on the equipment would be about AUD$570 before GST each month for five years, assuming a 10 per cent residual remains payable at the end of the term and there is no option to purchase. Rather than claiming depreciation as an expense, the entire lease rental (inclusive of GST) becomes tax deductible. This amounts to a total of AUD$34,200 over five years. The AUD$3,000 pre-GST residual would not be tax deductible.
It is also important to note that the treatment of GST varies for lease, chattel mortgage and hire purchase, and this should be considered when assessing the most appropriate structure for your circumstances.
Manage Your Cash Flow
Working capital is the bloodstream of your business. Optical professionals who have significant amounts of cash can choose to use personal funds to make purchases for the business and for working capital. However, there are often benefits to saving your cash – and there are plenty of deposit facilities where you can earn a high rate of interest.
If you require a cash flow management tool for your practice, an overdraft provides a safety net for unexpected expenses. It can be used for working capital needs, advance bill payments and other cash flow requirements. In the set-up process, an overdraft can be used to subsidise costs that are not asset based – such as telephone set-up costs, staffing costs and stationery.
An overdraft facility that doesn’t charge you fees if you don’t use it gives you confidence in managing your cash flow – especially in the early stages of setting up, while using personal funds to pay business debt establishes poor accounting practices that may be difficult to unravel.
Fit-out for the Long Term
Customers and potential customers often judge the quality of a practice on its aesthetics – which means spending money on a good fit-out can be worth the outlay. However, a practice fit-out can be a complex task that may unveil unforeseen costs as you progress – such as design or even changes in personal preference.
When fitting out your premises, you could fund your practice assets by leasing them in one facility with a single easy repayment structure. Alternatively, using project finance, your financier
can look after all progress payments and drawdowns required over the life of your project, rolling the final amount into one easy finance arrangement. This arrangement provides the flexibility to cover for any unforeseen costs, while the pre-approved limit gives you peace of mind.
Protect Your Best Asset
There is a range of personal insurance products available to protect your future and your family’s wellbeing – such as income protection, trauma insurance and life insurance. There is also insurance to protect your business – such as business expenses insurance and key person insurance. A reputable insurance broker can do the hard work for you and ensure you are adequately covered.
Find the Right Finance
A practice that operates without the appropriate finance structures in place can be likened to a presbyopic trying to perform close-up work without spectacles. A practice that makes short-term financial decisions without thorough assessment can find itself with long-term financial burdens that are not in the best interests of the practice… just as someone with an untreated eye disease runs the risk of suffering from visual impairment.
To get the best result for you, discuss your needs with a financial specialist who understands your profession and your financial circumstances.
Barry Lanesman, a consultant with Investec Medical Finance, has played a key role in the development of specialist finance for the ophthalmology and optometry professions. He has also had extensive experience in private practice, as a registered dentist. For information on Investec Medical Finance phone (AUS) 1300 131 141.
The information contained in this article (“Information”) is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the Information is accurate and opinions fair and reasonable, no warranties in this regard are provided.
We recommend that you obtain independent financial and tax advice before making any decisions. The opinions expressed in this article are those of the author and do not necessarily reflect the opinions of Investec Bank (Australia) Limited.
