Navigating Financial Success: Why Every Practice Needs a Budget

Navigating Financial Success: Why Every Practice Needs a Budget 

So, what’s all this hullabaloo about budgets? And why would you want one? Consider that a budget is like your financial GPS. By utilizing one, you can determine where you’d like to go financially, and then you can assess your progress against that plan.    

We work with a lot of small and mid-sized practices that operate without a budget. It is possible to do, and some groups just compare their financial performance to last year, or the last year to date. This can be an effective way to start if you don’t use any measuring tool at all, since it doesn’t require any preparation.   

When we prepare a budget, we are looking at the Profit & Loss, or the Income Statement. This report shows financial activity over a certain time period, most commonly a month. It shows the inflows of money, typically called Revenue – and it shows the outflows of money, called Expenses. When you subtract the Expenses from the Revenue, that is typically called Net Income, and it’s the amount of money that you and your partners get to split up and take home if you’re in a private practice.   

We begin our budgeting process by seeing how the clinic performed in the same time period in the prior year. As much as we may not think so, medicine is a seasonal business. First, we deal with flu season in the Winter, deductible season in the Spring, then I’m-not-going-to-the-doctor-because-it’s-Summer season. Finally, we end the year with I-HAVE-to-get-in-because-I-already-met-my-calendar-year-deductible season.    

Each of these seasons has an impact on the financial health and the ebbs and flows of money through your practice. If we begin the budgeting process with a look back at last year’s performance, this is very instructive. Then you’ll get to think through what may have changed, or if there were any unusual events that won’t reoccur. A pandemic is an excellent example. A new physician starting in your practice or the departure of a physician from your practice are also examples of events that will have a significant impact on your financial performance and should be considered in your budgeting process.  

Now, as we begin writing a budget, we always aim to have a conservative budget, so that when you outperform it, everyone is pleasantly surprised! ​By conservative budgeting, we mean estimating low on revenue and adding in all the expenses you think are reasonable. This gives you the best chance of leaving everyone pleasantly surprised. Be sure you don’t go too conservative; you might scare everyone when you present the budget if it looks too dire!  

As we’ve said, the historical perspective is always instructive, and once you’re clear in your review about what happened last year and how it will impact your budget, you can begin looking forward. We typically take last year’s total performance and divide it by 12 to create a monthly budget. Then we can make appropriate seasonal adjustments for months with 3 payrolls (if your payroll is paid bi-weekly instead of semi-monthly). We also adjust for Medical Malpractice premiums, which are frequently paid quarterly. We then add in quarterly and annual expenses like tax preparation, quarterly tax payments, legal expenses, and contributions to 401(k) or profit-sharing plans.  

If your budgeting is a bit more sophisticated, you might consider building a dynamic budget utilizing patient volumes, so that you can adjust for those and create some different scenarios if your practice is in a space of growth. 

When your budget is complete, you can load it into your accounting system and prepare a monthly Profit & Loss Statement that compares the budget to actual performance. Your report should include four columns: Actual Performance, Budget, Dollar Variance, and Percent Variance. More on variance analysis in an upcoming newsletter. Happy budgeting! 

Want help creating a budget or see if your current budgeting practices are effective? Health e Practices can guide you through the process, provide clarity over every aspect of your practice’s finances, and identify growth opportunities. We’re here to help – To get started, contact our Director of Sales, Dave Beatty, at Dave@healtheps.com  

 Jill Arena