This is a two-part series focused on Budgeting and Forecasting within a small business. While reading, please keep in mind that it is never too late to begin forecasting and budgeting practices within your business.
Let’s begin with explaining a basic difference between budgeting and forecasting. Budgeting is quantifying the expectation of income and expense for a given time period based on what a business would like to achieve. A detailed budget is usually created and updated on an annual basis; however, it is reviewed and compared to actual results monthly to analyze variances.
Forecasting is a planning tool used by management to help with decision making and understand where the business is going. These tools are typically for short-term considerations updated on a regular basis such as monthly or quarterly and used for major revenue and expense line items. Very simply put, a budget is a plan for the direction a company would like to take whereas a forecast is an indicator of where the company is actually going.
Part 1: Business Forecasting for Medical Practices
Business forecasting is the process of making predictions of the future by analyzing trends and historical data. The purpose of creating a financial forecast for your medical practice is to anticipate possible future business conditions so that decisions can be made to help you develop long-term strategic plans and aid in the achievement of your established goals.
Forecasting tools all work basically the same way. First you determine the problem or issue you are interested in, such as “how much cash will be on hand at month end”? Once the issue is determined, you need to identify the variables that affect the issue and how to collect the relevant data. Next, determine the model you would like to use in order to display the collected date, such as an excel spreadsheet. From here you analyze the data creating a forecast. The final step is to verify that the forecast is what actually happened or refine the process to more accurately reflect what happened.
It is very important to understand your company’s cash needs and having a monthly cash flow forecasting tool. Reviewing it on a regular basis will aid you in making good business decisions. In order to create this management tool, you first need a solid method for forecasting your monthly revenue. Rely on your practice management system to provide historical data in order to project revenue. Factors to consider when forecasting revenue are:
- average reimbursement rates
- gross collection rates
- net collection rates
- days in account receivable
- seasonal fluctuations
Many of these figures can be compared to national or regional statistics to see how you compare to similar practices or to determine issues that need to be addressed.
Once you have a firm revenue projection, which is a valuable forecasting tool in itself, use this figure as part of your cash flow forecasting tool. Add cash on hand at the beginning of the month to your projected revenue. Then estimate your upcoming expenses as well as your salary requirements to determine cash on hand at the end of the month. At the end of the month revisit the analysis to see how accurate your tool is and make any necessary adjustment for future cash flow projections.
Keep an open mind as you analyze your forecasting tools and financial statements. If you see an issue you wish you had been able to predict, but missed, try to develop a tool that will help you spot this potential issue in the future. Involving key members of your staff in this process is crucial as they are often closest to what is really happening in the business and can provide great insight in developing these tools.
The practice of forecasting by analyzing historical data and trying to predict future performance will help you manage negative external factors that threaten your business. Forecasting will also allow you to make better business decisions, after careful deliberation instead of reacting poorly to negative factors or crises that arise, resulting in a more successful business.