Financial Budgeting for your Medical Practice

Part 2:  Financial Budgeting for your Medical Practice

This is the second  of our two-part series focused on Budgeting and Forecasting for your medical practice.  We will concentrate on Budgeting this edition. As mentioned previously, it is never too late to begin the practice of budgeting, so don’t feel like you have to wait for a new calendar year to begin developing a budget.  In addition, keep in mind that it is best to rely on crucial members of your staff to develop or aid in developing a budget since they have knowledge of your critical business practices and functions.

One advantage of budgeting is that it allows a business to identify its needs, increasing the likelihood of remaining healthy through all markets.  When creating your budget, a good starting point is to outline where you want your business to go.  You will be required to make certain assumptions or predictions, some of them outside of your control.  In order to manage these assumptions, it is best to clearly identify and document them so that you can reevaluate them on a regular basis when reviewing your budget throughout the year.  Some assumptions to consider are number of patients, adding a provider, expanding practice locations, regulatory changes and technological advancements.

How to Create a Medical Practice Budget

Once your assumptions have been established, begin creating your budget model by delineating fixed expenses, such as rent, insurance, interest and utilities. You can be fairly confident that you will incur these expenses in the coming year.  The next step involves looking at expenses that fluctuate in correspondence with revenue also known as variable costs.  As revenue grows by a certain percentage, so do these expenses.  For the most part these expenses, such as payroll, medical supplies and billing services, reflect the fluctuation of revenue. For example, as patient load increases, so does the need for staffing, resulting in an increase in payroll expense.  On the expense side, wrap up your budget by projecting expenses you have the most control over.  Identify discretionary costs you might cut if times are tough or areas you will develop if you exceed your expectations.

Monthly financial statements should be reviewed by business owners in order to help plan for growth, monitor progress and identify potential financial problems.  It is helpful to compare the statements to previous month as well as budgeted figures.  You can ease in to this process in order to gain familiarity and as months go by with regular practice, you will begin to easily identify trends and be able to spot potential issues.  In addition to reviewing balance sheets and income statements, do not forget to include the statement of cash flow in this process as it shows the uses and sources of cash and the change in your cash position.

Budgeting is an essential process that provides various benefits to a medical practice if used judiciously.  This management tool can help you make strategic operating decisions and manage adverse elements that threaten to interrupt the financial success of your business, leading to the achievement of the organization’s future goals.