BY REED TINSLEY, CPA, CVA, CFP, CHBC
Plan where your money and your practice are going
Budgeting is your financial map. A good budget encompasses all the financial details of running your practice. “Good budgeting” goes further and projects how those details will help achieve your and your practice’s larger, long-term goals. Strategic questions like, “What do we want to be doing in five years?” produce natural operational questions like, “What will we do next year to put or keep us on that path?”
This strategic planning step involves questions about internal (physician goals) and external (competition and other market forces) factors like:
• Do you want to make the practice larger?
• How can you keep the cost of malpractice insurance from strangling your practice?
• Should you add physicians? Or increase your geographic market with an additional office?
• Should the practice introduce new services you’ve referred out in the past?
Where to start
Budgets usually work best when they reflect what the management team genuinely expects to happen in the coming year -- especially if the team is new to formal budgeting.
That said, you will probably want your manager to run some optimistic, pessimistic and middle-of-the-road scenarios, so you know what to expect if the unexpected happens.
Start your budgeting process by looking at what you will take in as revenue. That is probably the most important -- and most conjectural aspect of the entire effort.
Experienced budgeters can effectively use revenue projections to set growth goals for the coming year(s). Planning for continued growth keeps the pressure to produce on physicians and employees — particularly when they are included in a performancebonus pool.
If you are just starting out with budgets, begin with only the upcoming year. Make your first effort as straightforward as possible. While so-called stretch goals might motivate competitive doctors, you can kill any enthusiasm for the entire budgeting process if you set targets too high and spend the whole year “behind budget.”
Keep it real
If you do build stretch goals into your budget, base them on something realistic. When you budget new revenue, make sure there is an achievable source, such as adding new services, opening a satellite office, or hiring a new provider. Do not budget a 20% revenue increase in 2003 if you are basically planning to do the same things you are doing in 2002. That is just wishing for growth.
The same idea applies to expenses. There is no sense in budgeting a 5% reduction in expenses without some plan for achieving that objective.
As you become more comfortable with the process, budget further into the future. The long-term numbers will no be precise, but they will help you keep sight of your goals. Suppose your group wants to expand from a single site to three offices within three years. How are you going to pay for it? Long-term budget planning shows the path to that expansion objective.
Do not just create and forget about your budget until you begin the process again next year. Track it monthly and measure your progress. Examine discrepancies to find their cause. By doing so, you will steadily develop a more complete understanding of your finances.