Feasibility Studies



A feasibility study should precede both start-up practice ventures and any changes to an existing practice that will significantly alter the cost structure of the practice.

The Start-up Practice Venture
Feasibility studies are essential to start-up practice ventures. Most start-up ventures will require bank financing. Banks will insist on proper market and financial analyses. Feasibility studies should include:

  1. Market Analysis
  2. Prediction of Market Penetration
  3. Prediction of the rate of Market Penetration
  4. Proforma Income and Cash Flow Statements that incorporate conservative scenarios of market penetration
It is absolutely imperative to ensure that there is appropriate demand for services before entering a market. A lack of demand will only lead to a disappointing or even stifling financial outcome. Where satisfactory demand is identified, the physical capacity of the new practice should be matched to the forecast demand.

Reviewing the articles on Deriving Value from the Practice, and Matching Supply and Demand will be of benefit in understanding the relationship between demand and capacity as well as the risks associated with new practice ventures.

Sample Feasibility Study


Changes to an Existing Practice
Those changes that will significantly alter the cost structure of an existing practice are typically related to practice capacity. Practitioners that sense the demand for services is reaching capacity have a natural tendency to want to add capacity to satisfy the demand. Capacity is typically added in the form of staff capacity or facility capacity.

Adding Staff
Small increments of staff capacity can be added if there is an opportunity to employ part-time individuals. Making a commitment to a part-time employee is far less financially draining than that required to add a complete additional salary. Nevertheless, before adding an employee, one should be cognizant of the effects on net income and overall staff efficiency. Overall staff efficiency is normally measured as a ratio of staff cost to practice revenue. This ratio can be compared to historical practice data and to industry averages.

Lifestyle represents a common motivation for practice owners to add an additional veterinary salary. There is always a hope that the additional capacity to serve clients will result in additional revenue. In order to maintain an equivalent level of profitability, an annual veterinary salary of $65,000 must generate approximately $82,000 of incremental revenue. If additional support staff were needed to assist the added veterinarian, the required revenue to "break even" would be even greater.

An alternative to adding capacity is to control demand. Reviewing the articles on Matching Supply and Demand, and Pricing will be of benefit in understanding the relationship between profitability, pricing and capacity.

Adding Facility Capacity
Additional facility capacity is generally added in "lumps". It is more cost effective to add more physical capacity than presently needed than to add a small amount of capacity now and then another increment at a later date.

The capacity not used represents an ongoing expense, and often a significant expense. This expense, accumulated over several years of capacity under-use, is very costly. Added capacity is even more expensive if it is never fully used. In this case, the ongoing operating expense of carrying the capacity is never ending.

An alternative to adding capacity is to control demand. Reviewing the articles on Matching Supply and Demand, and Pricing will be of benefit in understanding the relationship between profitability, pricing and capacity.