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Case Study: Investing in new equipment

Healthcare finance case study

 

 

 

 

 

ABC Specialist Medical Centre Pty Ltd opened in 2002. The owner is Dr Smith, a medical specialist, who works full time in the practice. Dr Smith is a very busy man and his waiting room is always filled with patients.

Freddie Jones works for XYZ Equipment is trying to sell Dr Smith a $120,000 machine.

Being the busy Doctor that he is, Dr Smith tells Freddie that the machine is far too expensive at $120,000 and he needs to heavily discount his price.

Freddie, decides he can offer a discount of $10,000 but understands that the Purchase Price wouldn’t be so much of an issue, if the Doctor financed the machine, the monthly cost would then be so much easier to manage. Freddie calls me and we have a discussion.

I suggest to Freddie that I speak to Dr Smith so that I can act for him and help him concentrate his focus on the true benefits of the proposed purchase. Often clients get caught up on purchase price, interest rate, monthly cost etc and the months drift by. These things really become less important if there is a sound commercial plan for the machine.

I meet Dr Smith and gain a full understanding of his practice, lifestyle and demands on his time. I ask him why he is seeking to buy the machine and learn that it is a replacement for an older, slow, inefficient machine that provides poor images and is expensive in terms of consumables, down-time and repairs. Whilst the machine isn’t a core asset of the business, when it is not working properly or at all, it causes inconvenience for the whole practice.

Dr Smith has spent many years nurturing his practice and his professional reputation, so he is also concerned that poor equipment reflects badly on his clinical ability as far as his patients’ PERCEPTION is concerned.

I advise the Doctor that if we start with the numbers we can work back from there…  Typically a $100,000 asset financed over a 5 yr term,  as a Chattel Loan or CHP  will cost around $2000 per month  with almost any bank.

COST      $2,000   per month

I ask how many treatments per week he is currently performing with his current equipment and the charge-out rate for those each treatment.

Treatments per week     5
Charge rate   $150
Income  

$750 per week or $3000 per month

I ask the Doctor if he had the new machine, which is faster, more reliable, easier to use, giving better imaging and therefore better patient outcomes how many treatments he would perform each week.

Treatments per week     10
Charge rate   $150
Income   $1500 per week or $6000 per month

 I remind him that he would have finance payments of $2,000 per month out of the income of $6,000 per month but the purchase makes commercial sense and shows a good return on his investment.

In fact Dr Smith’s real loss has been the 3 months he has spent negotiating the purchase price.

I also let him know that as well as the clinical benefits of offering his patients better medicine, the efficiency will deliver back to him something that cannot be bought once spent – TIME.

I will also work with his accountant to make sure that the appropriate Tax-Planning is in place

We agree a ideal install date and work with financier & supplier to achieve that for the client.  I work for the client so that installation and payment is on time and on budget.

Having said all that if a machine is not going to at least pay for itself PLUS a return for clients, I am duty bound to advise them to seriously re-consider the purchase.

Healthcare Finance Specialist Steve Daley

Steve Daley 
Managing Director
Healthcare Financial Strategies

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