Financial Planning for Healthcare Startups

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In 2023, healthcare startups raised the lowest amount since 2019, clocking in at only $10.7 billion. But now, funding is on the increase, presenting an opportunity for new startups. However, this means it’s a competitive industry, and if you have a healthcare startup, it needs to stand out from the crowd. 

Part of that is effective financial planning. This encompasses more than keeping your business on track financially; it’s a vital tool to communicate clearly with investors.

Below, we’ll help you navigate the complexities of financial planning for healthcare startups, from sourcing funds to managing risks. 

 

Securing Funding 

Thankfully, there are quite a few ways to secure funding for a healthcare startup. But each comes with its own pros and cons. 

Bootstrapping

Paying your own way is one of the most common methods of generating funds. Whether this is through loans or lines of credit, it boils down to your creditworthiness and collateral. 

Banks offer a number of loan and credit options for startups, including equipment financing. However, they are generally secured by collateral, usually in the form of assets pledged as security for repayment. Moreover, you’ll need to consider interest rates and repayment schedules, which can present cash flow problems down the line. 

Venture capital

Venture capital funding is a popular choice for healthcare startups that expect high growth. Venture capitalists usually invest in businesses in exchange for equity. Often, such funding is available for startups at a later stage of growth, nearing IPO. However, these funders expect a good return on investment. As such, it’s important to be able to demonstrate that your startup can deliver a return on investment

Angel investors

Angel investors can be individuals or groups, and funds raised this way may be pooled between several partners to lower their risk. Investments are usually made during a priced round, or when the value of your startup is determined. 

Some angel investors also offer management expertise to startups not yet ready for funding. While this can be very helpful if you’re new to the business environment, it might also mean you’ll have to give up a degree of control, or some of your decision-making power.

Crowdfunding

Crowdfunding platforms and peer-to-peer lending networks can help you raise small amounts of capital from a large number of independent investors. As a bonus, you don’t have to offer up equity for these funds. 

On the downside, it’s not a guaranteed way to raise funds, nor is there any assurance that you’ll be able to get as much money as you need. 

Grants and government funding

Another option is to consider government-funded loans from the Small Business Administration (SBA). SBA loans are often provided to small businesses that can’t secure funding through other lenders. They often have lower interest rates, longer repayment periods, and flexible eligibility.

Alternatively, there may be grants available. These are usually non-repayable funds provided by government agencies that support healthcare entrepreneurship and innovation. To qualify for a grant, you’ll need to be able to show that your startup can align with the grant’s funding objectives. 

For example, there are the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs for technological innovation. The eligibility requirements include that your startup is for profit, more than 50% owned and controlled in the US, and has fewer than 500 employees. 

Grants can come from a number of sources, including the National Institutes of Health (NIH), disease foundations, or the Agency for Healthcare Research and Quality (AHRQ). As such, there may be a suitable option for you, depending on your business needs and company objectives. 

 

Strategies for Securing Funding

With so many funding options available, it’s vital to have a funding strategy in place. This starts with an understanding of the regulations governing the healthcare industry. 

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Next, you need to assess your needs. Knowing exactly how much funding you need, and for what, will help you determine who to approach. Keep in mind factors like rent, equipment, wages, supplies, marketing expenses, and overhead costs. Don’t forget about commonly overlooked costs such as insurance, regulatory fees, and taxes. All of this requires research – your estimated costs must be as accurate as possible. 

A business plan

Then, you can draw up a compelling business plan. This doesn’t just outline your business goals, objectives, and overall vision. It helps you to make strategic decisions for financial planning, attract investors, and pinpoint your company’s strengths and weaknesses. In short, it can demonstrate your company’s potential to succeed.

Your plan should outline how you’ll achieve your objectives. It contains information like:

  • Your vision, mission, and goals 
  • Your products or services
  • A marketing plan
  • A financial plan and cash flow projection
  • Details about your competition
  • Risk factors

Once this is in place, you can start appealing to the right people for help. 

Building relationships

Building relationships with potential investors is a vital component of a funding strategy. This includes researching and identifying funders with a track record in healthcare startups. Make sure you understand their investment criteria, typical deal sizes, and the stage at which they provide funds. That way, you can tailor your pitch to align with their priorities. 

Don’t forget to make use of connections you already have. Consulting with advisors or mentors can help establish a more personal connection with investors. 

It’s also useful to attend industry events and get to know the key players in the field. That way, you could form strategic partnerships for potential collaboration. 

Budgeting and Managing Operational Costs

Many healthcare startups fail because they run out of money. And while securing financing is a great way to establish your business, you still need to be able to manage these funds. This is where effective budgeting comes into play. Your budget is a road map for financial planning, allowing you to allocate resources, manage cash flow, and make good decisions. 

Developing a startup budget

All good budgets start with cost identification. Of crucial importance are the essential startup costs you incur before you launch your business. These include assets like equipment, inventory property, or vehicles. These expenses are considered capital expenditures, and they aren’t tax deductible, which obviously affects your bottom line. 

On the other hand, startup expenses including rent and payroll, are tax deductible. 

You’ll also need to consider your ongoing operational expenses. These can be fixed or variable. Fixed costs include your rent, payroll, professional services you enlist, and bank fees. Variable costs are things like utilities, raw materials, equipment and shipping, travel expenses, or income taxes

Knowing what you’ll be giving out each month will help you create a realistic budget. It will help you respond to different business cycles. 

Remember to budget for the unexpected. We suggest creating an emergency fund that can act as a buffer for expenses you may not have budget for, like repairs or legal fees. 

Strategies for managing operational costs

The best way to manage costs is to prioritize your spending. You must consider the return on investment (ROI) of your expenses, through a cost-benefit analysis. Allocate more of your budget for areas you know will have a higher ROI, and establish strict financial controls. For example, you could establish an approval process for invoices, and regular internal audits.

This means you’ll need to regularly review your budget against your startup’s performance, to identify issues and make adjustments. Using accounting software like QuickBooks or NetSuite can help you track your revenue, and create financial reports for in-depth analysis and audits. 

Another option is to negotiate your vendor contracts, to ensure you receive the best value for money. 

Finally, you’ll need to implement cost-saving measures to prevent overspending. This might include cutting back on unnecessary expenses, or decreasing budget for items with lower ROI. 

 

Tax Planning for Healthcare Startups

A tax strategy is important to help you stay compliant with the IRS, and also to help save your business money. 

But since tax laws are always changing, it can be difficult to ensure compliance. After all, different business entities have different tax treatments. The first step in tax planning should always be to research the tax laws in the states you operate in. It’s also always a good idea to consult with a tax professional, to ensure that you’re making the most of any possible savings for your chosen business entity.

For example, business owners of corporations and LLCs often have personal liability protection against business debts or bankruptcy. But if you’re starting a new business alone and are looking for a less complicated tax structure, a sole proprietorship may be best for you.

Tax deductions and credits

There are many tax credits and deductions available for healthcare startups, and to miss out on them would be like throwing money away! After all, claiming them lowers your taxable income.

For example, the federal research and development (R&D) tax credit incentivizes new product development. Qualified expenditure can include wages, raw materials, or supplies used. The credit is available to companies during their first five years of existence, or during the first five years that they have any revenue, so it’s ideal for startups. 

Or there’s the Work Opportunity Tax Credit for businesses that hire and employ people from groups that have faced significant barriers to employment. Businesses that qualify for this credit can receive up to $2,400 per qualified new hire.

Qualified business deductions also reduce tax liability. Knowing which deductions your business is eligible to deduct can help you develop a tax-saving strategy and help you improve your bottom line.

Some of the most common deductions typically include those that are ordinary and necessary in the healthcare industry. For example:

  • Office and building expenses. 
  • Employee-related expenses.
  • Operational expenses.
  • Travel.
  • Insurance and depreciation.

Compliance with tax regulations 

The healthcare industry is subject to certain regulations that aren’t always applicable to other industries. For example, non-profit hospitals and organizations can obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. But they must also meet certain requirements to maintain this exemption. 

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When it comes to tax compliance, it’s best to consult with a professional.

 

Financial Forecasting and Projections

Another critical component of financial planning for healthcare startups is forecasting. This is the process of predicting your company’s performance based on current market trends and future projections. It’s an essential way to gain insights into potential revenue, expenses, and cash flow.

There are four main types of forecast methods:

  • Straight-line forecasts assume a constant growth rate for revenues or expenses based on historical figures
  • The moving average method uses the average of your current and past variable values to smooth out fluctuations and predict future values. 
  • A simple linear regression forecast is a statistical approach to determine the relationship between an independent variable (like time) and a dependent variable (like sales). 
  • The multiple linear regression method features more than one independent variable (such as time in addition to price or marketing) to explain the dependent variable. 

Forecasts can help you plan the perfect time to make large purchases or significant expenditures. After all, they allow you to mitigate risk and proactively plan for the future.

Creating financial projections

Forecasting includes a number of components. Start by gathering any historical data and conducting market research. Next, identify your revenue streams and estimate your expenses. Then you can calculate your cash flow projection, by predicting how much money will go into and out of your business over time. 

Finally, you can create Profit and Loss Statements. These financial statements provide an overview of your startup’s profitability, to assess its financial viability.

Investors will scrutinize your financial forecasts to assess your startup’s viability and growth potential. A good forecast should therefore be able to highlight your startup’s projected profitability. As such, it’s important to regularly review and update your forecast. 

If you need help with creating a financial forecast, consider reaching out to a CPA.

 

Risk Management 

No healthcare startup is without risk. However, being prepared for any situation can help you mitigate the impact or potential risks. 

It’s important to consider the risks common to your industry, such as the need for excellent security to prevent breaches of confidential data, managing medication, patient rights, and financial compliance. 

Risk management begins with the identification of what can go wrong. Then, you can implement strategies to try to prevent this, or deal with the situation if it can’t be avoided. This includes implementing strict internal controls and procedures, as well as plans for responding to any worst-case scenarios. 

It’s vital to conduct risk assessments. You need to prioritize your identified risks in order of severity and potential impact. Then, you can determine contingency plans for high-risk situations. 

Insurance

One way to reduce the financial impact of a risk is through insurance. This includes traditional insurance for assets like property and equipment, as well as liability insurance. 

This can help protect your startup from malpractice claims. Many states and healthcare regulatory bodies require providers to carry specific types of liability insurance as a condition of licensing or operation. Other types of liability insurance, such as cyber or product liability insurance, can also help you guard against the expenses associated with cyber-attacks or claims against products or devices you may sell. 

If you need help with financial planning for your healthcare startup, schedule a Discovery Call with one of our CPAs. With years of experience in the healthcare industry, we understand your unique needs, and how best to help you. 

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The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.

 

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