It's a new year, and it's time to make decisions that will help you accomplish your objectives during the year. Many practices fail to plan, seemingly being resigned to not being in control of the results that their practice delivers. To better take control each year, a financial budget is crucial to help you ask a few key questions and to make a few high impact decisions that will largely determine the results of your practice for the year. Building an effective budget doesn't have to be complicated.
To begin, export your profit and loss statement from the past year (or the most recent 12 month period, if it's before year-end) into Microsoft Excel. Then, next to each expense item, calculate the percentage of revenue that it represents in last year's P&L. For example, if revenue was $2 million, and drugs and medical supplies was $450,000, then drugs and medical supplies would be 450,000 / 2,000,000, or 22.5%. You can do the same for all line item expenses and categories. As we've discussed repeatedly at IsMyPracticeHealthy.com, payroll-related expenses represent the largest expense category, and Cost of Professional Services (COPS - Inventory, supplies, lab expenses, food and bedding, mortuary costs, etc) represents the second highest expense category. At the very least in your budget, estimate what your revenue will be this year based upon last year and what you plan to do this year. For example, if you project a 10% increase in revenue (revenue X 1.10) that would be $2.2 million projected for this year. If you change nothing in your management, your total expenses as a percent of revenue will likely be about the same. So, if your expenses represent 95% of your revenue, then your projected 2017 expenses will be .95 X $2.2 million. You can do the same projection for payroll expenses and COPS. Typically, these two categories represent about 60% or less of your revenue in a healthy practice. In many practices, they represent even more.
You can then make decisions to change your management, and make projections about how that will change your expenses. Ideally, you devise a plan to increase revenue by a higher percentage than you increase related expenses, so that you deliver more profit. You can establish goals for your major expense categories, representing them as a percent of revenue, so that as the year progresses, if categories are far outside of where you projected them, you can dig deeper in your financials and learn why, and make management decisions to change appropriately.
So to complete your budget, complete this exercise with your largest expense categories. Then, each month, as you go through the year, you can compare a current P&L to this budget, and to last year's numbers, taking specific note to assess what percent of revenue your expense categories represent. If they are very different from your budget, identify why, and you will have the ability to make decisions to get back on track.
You now have a budget! Start simple. You will improve it as you learn to use it. Have a great 2017!