Be Careful When Calculating Equipment ROI

June 25, 2013

To download this article, click here: Be Careful When Calculating Equipment ROI


Question:

“I am in a three-­‐physician family practice, and my partners and I are debating whether to acquire laser equipment to begin offering certain cosmetic procedures to our patients. How do we calculate the return on our investment for acquiring the equipment? And are we better off purchasing or leasing?”

Answer:

Lease vs. Buy – This is a question medical practices have asked for many years. Unfortunately there is no clear cut answer. In today’s economic environment banks are offering historically low interest rates to physician practices to make capital purchases while equipment lease contracts tend to have higher assigned interest rates and additional fees. Most medical equipment purchases have accelerated depreciation schedules (Section 179 accelerated depreciation for example) which can offer the practice a tax advantage. A Section 179 expense deduction allows medical practices to deduct the purchase price of certain equipment -­‐ Instead of depreciating the purchase over time, you can use Section 179 to deduct the price of equipment, whether purchased or financed, in the tax year in which it was bought and placed in service.

The purchaser must also predict the lifetime use of the equipment to avoid owning obsolete equipment. If the purchaser predicts a short lifetime use because of technology advances, a lease option may be attractive as they can upgrade/replace the equipment easier.

What I find is those practices who are financially stable purchase equipment and those just breaking ground are afraid of the capital cost especially expensive equipment. I also find the practices that like the newest and greatest technologies often lease more often than they buy.

Return on investment means am I making a “profit” on the services being rendering with the new piece of equipment. Here is the typical ROI formulary:

Gross Revenues Collected __________
Less: Financing Costs (loan payments) __________
Less: Direct Costs of Operating the Laser __________
Less: Indirect Costs of Operating the Laser __________
Equals: Net Profit or (Loss) __________

 

I assume you’ve done your due diligence on potential utilization of the laser. What I find here is that most practices have overly optimistic revenue projects – so be conservative is my suggestion. However determining a true return on investment is a challenge because you have to determine the true cost of providing the service – this includes determining the direct costs (disposables/supplies, maintenance, laser tech, rent if the laser is stationed in one room permanently, etc) and the indirect costs of rendering the service (allocated receptionist time, billing staff time, etc).

You can calculate a ROI monthly, quarterly, and annually but to get a clear picture of profitability, I suggest an annual calculation.

In summary, always make sure there is a market for whatever piece of equipment you intend to purchase or lease. Will there be sufficient patient volume to justify the acquisition and make a profit? If the answer is yes, prepare a financial proforma to get an idea of profit that can be generated by the new service(s). Proper due diligence is the difference between a good decision and a bad decision.


To download this article, click here: Be Careful When Calculating Equipment ROI

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