Budgeting Your Medical Practice for Success

Do you assess your medical practice’s health based on how much cash is in the bank at the end of the year? Do you find your practice catches problems, mistakes and errors after the fact? Do you feel you have no control over the practice and only react to current “fires?”

If the answer to any of these questions is yes, then your practice will benefit from the annual budget - a very basic yet valuable financial tool. Among its many advantages, budgeting:

• Provides proactive, not reactive, management of the practice’s finances.
• Allows you to find problems and adjust to them quickly.
• Helps to eliminate “surprises” in physician compensation.
• Educates you about key drivers for your practice.
• Helps to plan for personnel changes.
• Helps to plan for acquisition of equipment.
• Allows you to address any annual budget implications of your strategic planning goals.

Here are basic steps used in preparing a good budget.

Be Sure the Practice Has Good Financial and Practice Data

The ability to prepare a revenue budget depends on the ability to obtain valid historical data (i.e., number of procedures, number of RVUs billed, average reimbursement rate, etc.). If internal data is poor, you will not get satisfactory value from a budget. If you are not comfortable with practice financial data, you must first strengthen the accounting/ finance department. Poor financial data (historical and current) could be an indicator of greater problems.

Benchmark Key Data

Next, benchmark key financial data from your practice with industry data, as well as historical practice data. This will help to challenge you as you proceed to the rest of the budget preparation. It will also allow you to maintain realistic objectives.

Determine Periods Presented in the Budget

Assess whether your budget should be presented as a monthly, quarterly or annual report. Practices without significant seasonality may choose an annual budget, which is simply divided by 12 for a monthly budget analysis. Practices having any type of seasonality (i.e. allergy practice) or significant growth, for example, may want to present the budget on a monthly or quarterly basis. Generally, more detail will lead to greater value to the practice.

Budget Your Net Revenue for the Practice

One of the most important aspects of a practice is its ability to collect patient revenue (revenue and collections are synonymous for purposes of this article). In budgeting net revenue, first look at historical collection and billing data. Historical data should be adjusted to reflect expected change in revenue such as changes in reimbursement from payors, payor mix, production, etc. Please note the revenue section of a budget can have many assumptions and drives the rest of the budget. Take time and great care in developing this portion of the budget and, above all, be realistic. Since many of the operating expenses (i.e., payroll) are based on budgeted revenue it is imperative this budget is a realistic expectation of the practice for the budget year.

The revenue budget should be reviewed periodically to adjust for changes in assumptions. Generally, this is done quarterly as a result of analyzing your actual versus budget variances. If actual results are trending higher or lower than budget, these variances need to be analyzed and the budget adjusted. This allows the practice to adjust quickly to change.

Budget Payroll Costs for the Practice

Now that you have budgeted for revenue (collections), you need to make sure the practice has personnel to service the number of patients needed to generate the revenue. Determine if the existing professional staff can safely and effectively service your budgeted number of patients. If not, determine the additional personnel needs and when they will be hired.

If another physician is being hired in the third quarter, for example, budget and plan accordingly to provide the support needed. Without the budget process, you may not know when to hire staff. This can lead to bad hiring decisions (i.e., hire a “live body” to help but not a qualified candidate). With a payroll budget, you can plan for additional personnel and start the hiring and training process sooner.

Budget time is a good time to revisit some of the processes and procedures of the practice and determine if any changes should be made to the Practice Model to improve quality or efficiency. It is also a good opportunity to review any anticipated changes in the industry that may impact staffing, such as the upcoming expected changes with regard to referral processes.

A practice may determine there is capacity with existing staff to generate the desired revenue. Even so, you will still need to assess the adequacy of current compensation. It is important to budget for raises, promotions, annual bonuses, etc.

The payroll budget needs to include not only wages paid, but also any other costs of labor including:

• Bonuses
• Overtime pay
• Health, dental, life and disability insurance
• Retirement plan costs
• Payroll taxes

Like all areas of the process, the payroll budget is flexible. If your patient load starts increasing, you can modify the payroll budget to compensate for additional productivity. Because the budget is compared to actual results, you should be able to react quickly to practice needs. This is much more difficult without a budget.

Budget Fixed and Variable Expenses of the Practice

Generally this should be the easier part of the budget process. Most of your expenses can be classified as either fixed or variable items. Even if the expense does not fit exactly into one of the categories, find the one that best suits the expense. For example, telephone can be a partially variable and/or fixed expense. However, it would take a significant change in patient volume to increase the telephone bill significantly. Therefore, you should classify it as a fixed expense.

Fixed Expenses

Your fixed expenses generally won’t change significantly based on changes in revenue. Fixed expenses include rent, insurance, telephone, etc. Because these costs are most likely fixed, you should be able to budget accurately. You will find historical data to be very helpful in assembling the budget for fixed expenses.

Variable Expenses

Variable expenses will fluctuate depending on practice production. Variable expenses include medical supplies, billing fees (especially contracted billing companies), lab fees, etc. These expenses can significantly increase or decrease based on revenue so you will need to determine a reasonable indicator of cost.

For example, medical supplies may be determined by using a fixed amount of $25 budgeted per patient as a reasonable indicator. As an alternative, you may determine a reasonable indicator is that medical supplies equate to approximately 5 percent of net revenue. Once again, historical data is crucial in preparing this portion of the budget.

Prepare Your Budget for Capital Expenditures

Now is the time to assess your capital expenditure needs (fixed assets) based on budgeted results. You may determine the practice will need to purchase $100,000 of new equipment. Further, you may find a need to obtain computer equipment and software for your electronic medical record initiative. These needs must be assembled as part of a capital expenditure budget and planned accordingly. There are many determining factors that need to be planned and budgeted. For example:

• Buy or lease?
• Pay cash or finance?
• Tax implications?

Assemble your revenue, payroll, expense and capital budgets into a final summary budget. Now take all your subsidiary budgets and assemble everything into one clear and concise master budget. This master budget should be simple, easy to read and list major categories only. This is the final product and should be used for variance analysis against the actual financial results for the year. Analyze the positive and negative variances and prepare an action plan to address variances. To receive the most value out of the budget process, you need to monitor actual monthly results against the budget. This is very important to assess where the practice stands as compared to budget.

By using a budget, you have a “benchmark” to assess and measure actual results. This allows for quicker feedback, identification of areas of concern and helps monitor progress more effectively. Going forward, challenge your practice to develop and implement this very basic yet valuable financial tool.

Deborah H. Wells, CPA, MBA, is a Shareholder and Director of the Medical Services Group of Alpern Rosenthal. She can be reached at dwells@alpern.com or at 412.281.1018.

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