Assessing the financial viability of expanding your physician practice

Assessing expansion plans for a medical practice: ©Parradee - stock.adobe.com

As a physician, there are many reasons to consider expanding your practice. Perhaps you've outgrown your current location, or maybe you want to serve a new population.

Whatever your motivation, expanding is no easy task. Business owners often assume that expanding will guarantee them more profit, but that's not necessarily true. Raising the startup costs alone can be prohibitive when it comes to opening up another location.

If you don't closely examine your finances to see what's viable, you could set yourself up for failure. So before you jump in, take these figures into consideration.

Six financial indicators to evaluate

The following financial indicators will help you assess the financial health of your practice, see a more realistic picture of the cost of expansion, and help you decide if it's the right next move.

1. Your financial goals

Before you look into any of your performance metrics, start with the fundamentals. You'll need to pinpoint exactly what you want to achieve by expanding, with specific numbers where applicable.

Do you want to reach a set new number of patients? Increase your revenue by a certain amount? Retire five years earlier than you had previously planned? Once you can quantify your goal, it will be easier to determine if the other numbers signal a successful outcome.

2. Cash flow

Cash flow, which is a comparison of how much your business is bringing in versus spending, is a key indicator of the financial wellness of your practice.

To evaluate your cash flow, you need to compare your total cash from operations, investing and financing to your total expenditures over a set period of time.

If you have a sustained, positive cash flow, you'll be in a better position, not only to maintain a healthy practice, but to expand. If not, you'll need to pinpoint and address issues, like problems with your claims management processes, before moving forward with expansion plans.

3. Profit margins

Profit margins compare your revenue to your costs, to see how much you're left with after covering expenses. Many business owners assume their profits will grow if they expand, but one Yale study found this is not necessarily true.

So before you expand, take the time to examine your profit margins and see what they tell you about how your business is performing, and where you may need to cut back on spending.

Healthy profit margins vary by industry, but generally fall between 5% and 10%

4. Growth fund

Next, calculate how much money you need to set up your new location, also known as your "growth fund." For many practices, it could cost as much as $100,000 to simply set up your second location for business.

To determine how much you need, list out all the upfront and one-time expenses involved with your expansion. These might include:

• Leasing or purchase costs for the new location
• Remodeling
• Furnishing
• Medical equipment
• Administrative equipment
• Legal services (for advising on issues like state and local compliance)
• Marketing
• Working capital (for 3+ months of operations)
• Recruiting and training staff
• Contingency budget for unexpected costs

5. Access to capital

Now that you have an estimate of your growth costs, it's time to figure out where your funding will come from.

If you need a medical practice loan or other financing, you'll have to make sure that you meet the loan eligibility requirements at a bank or the Small Business Association (SBA).

Each lender has different requirements, but most will examine your business and personal credit. They'll also look at some of your personal financial information, as well as your business records, including:

• Profit and loss statement (P&L)
• Accounts receivable
• Accounts payable
• Outstanding loan balances
• Cash flow statements
• Business plan
• Financial projections
• Tax returns

To qualify for the SBA's 7(a) loans for medical practices, you'll need personal credit scores of 660 or better, and you're required to have over $50,000 in collateral.

6. Market conditions

Another aspect of the financial viability of an expansion is market conditions. If your vision and funding are in order, but there's not a market for your services, your new location could be in trouble before you even open up shop.

Here are a few questions to ask that will help you understand your target market:

• Who are my ideal clients?
• What are my ideal clients' demographics?
• Where are these clients located?
• What services do they need?
• What businesses (aka competitors) are already serving this need?
• How can you differentiate yourself from the competition?

To help you get more familiar with your potential clients, you can use the SBA's free market research tools to dive into specific demographic data.

Decide: Do you want to expand or reinvest?

It's a hard pill to swallow, but expanding a medical practice is expensive and time-consuming, and there's no guarantee of success.

On top of that, medical practice leaders report their year-over-year operating expenses are up by just over 11% in 2025. In other words, it is as hard a time as ever to expand.

Does that mean expanding to a new location is a bad idea? Definitely not. But what it could mean is that there are better ways to grow your business. For example, instead of just looking into expanding locations, you may want to reinvest time and money into your current practice by adding telehealth services or taking on a new partner.

Sarah Brady is a freelance writer and credit expert who's been helping individuals and entrepreneurs improve their financial wellness since 2013. Sarah has written about personal and business finance for Forbes Advisor, Yahoo Finance, ValuePenguin and more. Before becoming a writer, Sarah worked as an NFCC-Certified Credit Counselor, a HUD-Certified Housing Counselor and she taught financial education workshops for the San Francisco Mayor's Office of Housing. You can reach her at LinkedIn.