Part 1 of a two-part primer for your practice.
Budgeting and forecasting are actually quite different. Simply put, a budget is about the direction your company wants to take, while a forecast is an indicator of where you’re actually going. Forecasting is a planning tool that helps you understand where you’re headed financially with informed predictions based on analysis of trends and past data. It’s typically focused on short-term considerations, is updated monthly or quarterly, and is used for major revenue and expense line items.
What’s the Issue?
All forecasting tools basically work the same way. First, you identify the issue—for example, “How much cash will be on hand at month’s end?” Then you identify the variables that affect the issue and how you’ll collect the relevant data. Next, determine your data model (e.g., an Excel spreadsheet), and from there, you create a forecast.
The final step is to verify the validity of your forecast. Did what was predicted actually happen? If not, then you’ll have to refine the process to more accurately reflect reality.
The Cash Flow Question
It’s crucial to have grasp on your company’s cash flow needs. Reviewing them on a regular basis will aid in making better business decisions. But first you need a solid method for forecasting monthly revenue. Rely on your electronic practice-management system for the historical data you need for a projection. Figures can be compared to national and/or regional numbers to see how you fare.
Here are some factors to consider when forecasting revenue:
- average reimbursement rates
- gross collection rates
- net collection rates
- days in accounts receivable
- seasonal fluctuations
A firm revenue projection is a valuable forecasting tool in itself—and you can use it as part of your cash flow forecasting. Add cash on hand at the beginning of the month to your projected revenue. Then estimate your upcoming expenses, along with your salary requirements, to determine cash on hand at the end of the month. Be sure to revisit your analysis at the end of each month to monitor the accuracy of the forecast, making any adjustments for future projections.
Keep an Open Mind
If you see an issue you wish you’d been able to predict but somehow missed, try to develop a tool that will help you spot it in the future. Involving key members of your staff in this process is important, as they’re often closest to what’s really happening in the business and can provide insight.
Accurate forecasting will help you manage the negative external factors that can threaten your practice. It also aids in crisis management, arming you to make the sort of decisions that lead to success.
Contact AssuranceMD to learn more.
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