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Your practice needs a budget!

June 2015

By Lisa Wood, Senior Vice President, Commercial Lending, BB&T Bank

When running a medical practice, it is easy to get bogged down in day-to-day operations and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans, and regularly monitor financial performance.

Physicians invest years in becoming highly educated in a particular set of skills. But even the most talented medical professionals will find the practice of medicine difficult, if not impossible to continue if they ignore the financial realities of modern medicine. A medical practice is still a business − and businesses need to be organized.

Budgeting lies at the foundation of every financial plan. It is a basic tenet of business - before you can make money you have to figure out how to spend it. A budget is a plan to control your finances, ensure you can continue to fund your current commitments, enable you to make confident financial decisions and meet your objectives, and ensure you have enough money for your future projects.

Using a budget as a tool, you can track cash on hand, business expenses, and now much patient revenue you need to keep your practice growing, or at least stay in business during tough times.

A budget is nothing more than a breakdown and plan of how much money your practice has coming in and where it goes. It should be done at least yearly. Most annual budgets are also divided up into 12 months and can be updated with actual expenditures and revenues each month so that you know you are on target.

Business planning is most effective when it is part of an ongoing process. By putting together a budget, your practice is helped by anticipating future needs, spending, profits, and cash flow. It can also help you spot problems early on, so you can make necessary adjustments before it is a much bigger challenge down the road. This allows you to act quickly where necessary, rather than simply reacting to events after they have happened.

If you do not have the discipline to sit down and assemble a practice budget, you may not have insight into how your practice is performing from year to year, or whether you have the needed funds to purchase that new equipment or EMR system you have been wanting. You may want to consult an accountant in preparing a budget, but it also may be something you can do yourself with small business financial software and/ or some of the free budget worksheets and templates available online. There are other reasons for putting together a budget, too. Bankers and other financiers may want to see a budget when you ask for a loan.

According to the U.S. Small Business Administration, a budget can be used to indicate some of the following:

• The funds needed for labor and/or materials;
• For a new business, total start-up costs;
• Your costs of operations;
• The revenues necessary to support the business;
• A realistic estimate of expected profits.

There are three Basic Budgeting Components: revenue, expenses, and profits.

Patient Revenue: Try to make these estimates as accurate as possible, but err on the side of being conservative. The best starting point for your projected revenue is last year’s revenue, assuming you have not added or lost any providers.

Expenses: How much it will cost your business to earn that patient revenue? A good place to start, once again, is those financial statements. These statements should include an itemized list of expenses you incurred during the year. Costs can be divided into categories: fixed and variable, and semi-variable. Fixed costs are those expenses that remain the same, regardless of revenue. Some examples include rent, leased equipment costs, and insurance. Variable costs correlate with revenue volumes. Examples include additional medical supplies needed during flu season, or additional nurses to see more patients as the practice grows.

Profits: Simple math-subtract your costs from your revenues. Hopefully, this is a positive number. Once you have profit estimates, you can start to plan for whether you can purchase new equipment, move to a bigger location, add staff or give your employees bonuses or raises. If you come up with a negative number, look over your projected costs to see where you can cut and/or consider additional strategies that will increase patient revenue.

Recommended Resources: Microsoft offers a series of free downloadable budget templates. These include a rolling budget for small business, an expense budget, a website budget tool, and an annual operating budget for a services business.