Our Veterinary Colleges educate most graduates to go out into the world and become business owners and employees. The principles of business management vary little from industry to industry. The business we enter is the practice Veterinary Medicine. Oh my, it appears that the curriculum didn’t have room to train us to be business owners and employees. We created ismypracticehealthy.com to provide a site for veterinarians to learn about business management in brief, high impact sessions.
One of the ‘must have’ tools in an optimally successful business is a budget. Looking at practices of all types, it is clear that most practices do not use a budget. We have recent data from the equine practice sector of our profession that tells us that 84% of equine practices DO NOT USE A BUDGET.
A budget is a ‘must have’ tool and most practices do not use a budget. This is a huge opportunity to improve the profitability of a practice. In an earlier Financial Friday we traced the flow of money from the P&L to the Cash Flow Statement and ultimately to the Balance Sheet. The budget most veterinary business people think of first is the P&L budget, also known as the operating budget. The cash flow statement has its own budget, known as the capital budget. The capital budget impacts assets and liabilities that are recorded on the Balance Sheet. Today we will look at the operating budget (based on the P&L).
From firsthand experience in dozens of practices, I know that in the beginning, planning a budget can seem like an impossible undertaking. Remember, you are learning a new skill set. Think back to the trepidation you felt going into your first surgery or worse yet in my case, your first biochem exam. Over time, with experience, you will realize that a budget is just a basic planning tool. The really good news is that using a budget lets you stop guessing when you make business decisions. A very practical computer programmer describes budgets as a ‘decision support’ tool for running a business.
An operating budget simply forecasts what your P&L will look like next year. That’s all there is to it. Budgets can vary from very basic to very complex in the amount of detail they contain. If you simply had one category for income and one for expenses, two category accounting, you might see that your expenses were too high or your income too low or perhaps both but it wouldn’t provide you with the information you need to make specific managerial changes. If we seek an effective decision support tool, the two category method doesn’t give us enough information. If we break the income and expenses into smaller categories we can quickly see which category is out of balance.
Just like every skill set you have ever learned, budgeting skills improve with use. If you develop a budget and use it monthly at a minimum, your first year budget will be pretty good, your second year budget will be really good and the third year budget will be GREAT! You will be able to forecast very accurately what your year-end profit will be months in advance. When you go to a banker for a loan to expand or to finance the sale of your practice your odds of getting the loan improve greatly if you come in with current and historical financial statements including budgets. Your practice will be more likely to sell without a lot of drama.
Building a budget can be simple. Most veterinary practices use QuickBooks as their financial management program and QuickBooks has a budget function that will build an operating budget with about three key strokes. More robust budget modeling tools are more complex and require more accounting input. No matter what your choice of budget styles is the key to budgeting success is first to have the discipline to use the budget every month to monitor your financial results and second to use the budget as a decision support tool when you make decisions that involve spending money in a category that you did not spend last year. If you will do these two things, you will improve the profitability of your practice.