3 Steps For Using a Budget to Meet Your Practice’s Financial Goals
When we say the word “budget” to our clients for the first time, we get one of two reactions. Either their eyes glaze over, bored at the mention of the word, or their eyes widen with a sense of impending doom. We know it isn’t everyone’s favorite topic, but if you give budgets a chance, they can be one of the simplest tools you can implement to get your practice on its way to meeting (and even surpassing) financial goals.
Let’s discuss three steps to take with a simple month-by-month estimate of your income, expenses, and profit for a one-year period to help you shape the future of your business.
Step 1: Set revenue goals
In budgeting, it’s important to think through the revenue estimate. In doing so, you’ll inadvertently set revenue goals. To do this, we start by asking questions.
If you want to generate $100,000 in collections next month, HOW are you going to get here? Is it realistic? How many patients will walk through your door on a daily basis, and how much revenue will be produced on average, from each patient?
By using your own historical revenue per visit and visits per day figures, you can plan for your next year’s revenue. Do you plan to see more patients? Increase fees? Open more days? All of these decisions will be considered as you work through your revenue projections. The result will be a month-by-month revenue goal, and how you expect to make that happen, and might look something like this.
“I will see 250 patients, will average $400 in collections for each, for a total of $100,000 in revenue, per month.”
Remember to plan for holidays and vacation days. If your providers take two weeks off in July, you can’t expect July’s revenue to look like June’s.
Step 2: Plan for expenses
Budgeting for revenue and expenses helps you understand arguably the most important factors to running a business:
Do I have enough money?
Am I making a profit?
Once you’ve determined your revenue, use historical financials to predict your monthly expenses. Some expenses will be the same each month, like rent and payroll. Review last year’s financials month-by-month to see what costs tend to be consistent.
Others, like supplies, will vary as your revenue does. As your revenue increases, these costs will go up. Once you have your expenses mapped out, you can see what’s left over and determine if you have what we believe to be one of the best phrases in finance: extra money.
With your extra money, can you afford to make the additional investments you’ve wanted in your practice? Perhaps you hire a practice manager or expand into a new operatory or treatment room. If you don’t have extra money, you have a simple question to answer: do you cut costs or increase revenue? It’s always better to know now than after you’ve overspent.
3: Create a path
The task of building your budget will leave you with a clear financial plan for your practice. You’ll know the best time to hire someone because you understand your revenue expectations. You’ll know both when you need more support and when you’ll be able to afford it.
You’ll have an idea of your cash flow position at various times in the year. Some months are consistently tough while others are better. What would it feel like to be able to anticipate the harder months coming and have a plan for them? Decision-making is easier when you have a plan and have some expectations for your business. When you know your expenses are in line with your revenue and your business is earning a profit, you get one of our favorite results: peace of mind.
We understand you may not smile like we do when we hear the word “budget,” but we hope your next reaction isn’t one of boredom or doom. Quite simply, budgets give you power. They serve as a goal setting tool, a plan for managing your cash flow, and a path to take you where you want to go.
If you struggle with the mechanics of developing a budget, get some help. Your CPA or financial advisor can help you understand your costs and develop your budget if it seems too daunting of a task.
One final important note: once you have your budget, don’t throw it in a drawer and forget about it. Compare your actual results to your budget, and answer some questions. Where you were right? What should you adjust? Are you meeting your goals? Are you spending too much?
It won’t be exactly right, but now you’ll know exactly where you were off and use what you learned to get it even better the next time.
Next time, you say? Oh, no. Your eyes are glazing over again.