Follow These Simple Steps to Build an Effective Practice Budget
Today’s ever changing marketplace calls for a meaningful creation of budget. The health care reforms, reimbursement challenges and economic uncertainly are a few reasons why practices need to have a strong handle on their finances.
A clear budget is often referred to as the foundation for any practice. While budget should have clear-cut goals, it should also include some additional elements that help in decision making and analyzing potential business threats. In essence, a budget should be specific, measurable and realistic.
Writing down this budget helps crystallize the strategies and choices of a physician owner and practice administration and bring their financial goals into the realm of possibility. Unfortunately, very few practices actually implement this task simply because they see it as an endeavor that is too complex and time-consuming. Below, you will get an idea about how to create an effective practice budget.
Effective Practice Budget
A budget should primarily incorporate a practice’s strategic financial goals. It is a way to create and establish financial expectations and compare actual performance with the set amount. There are many good reasons to have and use budget as a management tool. As long as a practice maintains control, budget is a convenience that can simplify various aspects of the business and allow it to acquire items/assets sooner than it might otherwise. However, if this budget is out of control, it can become one of the greatest obstacles to achieving financial independence. In essence, creating a working budget requires accountability from owners, physicians, practice administration and key stakeholders.
Steps for Creating a Budget
A simple budget process can be divided into various areas as follows:
– Review historical financial statements and reports concerning productivity
– Assess future changes that will affect the budget directly. These include changes in providers, professional fee reimbursement, new service lines, future capital purchases and much else
– Predict future operating expenses and productivity levels
– Incorporate standard budget with monthly report
Components to Create a Practice Budget
What is essential to creating and maintaining a meaningful practice budget is focus and attention. The below guidelines will help any practice weave its way through the process of budgeting and build a sound firm well-equipped for the future.
The Initial Step
A formal budget should begin at least two to three months prior to the upcoming fiscal year. This will allow the administration to forecast productivity and expected results and plan accordingly.
Involving Key Stakeholders
Involving key stakeholders means letting the members of the practice – employees and management – participate actively in aligning the goals for the financial success of the business.
Assessing Historical Data
It is important to gather and review historical data and records pertaining to the practice before setting the budget. This process includes employee productivity reports, payroll reports, financial statements, lease agreements and marketing plans.
Forecasting Provider Productivity
Another important factor to consider while budgeting is to calculate prior year’s net revenue as well as patient encounters. This will give a general idea about an active physician’s productivity level.
Reviewing Staffing Levels
Accurately forecasting costs related to staffing is crucial for a practice because wages and benefits to the employees form the major expenditure at any given time. Meaningful budgeting therefore requires scrutinizing future salary and benefits of each individual working for the practice. This process is also an opportunity to review the system and look for hiring potential and more suitable candidate for the job.
Reviewing Occupancy Costs
After payroll comes the occupancy-related costs such as building lease, rent, utilities and maintenance. This step involves going through lease agreements and making necessary changes in favorable of the practice.
Forecasting Variable Expenses
One of the best ways to avoid surprise costs associated with the practice is to develop a structural budget that will evaluate variable costs much ahead of time. These relate to surgical supplies, equipment and materials used during the job.
Identifying Other Expenses
Estimating expenses related miscellaneous items involves reviewing each category to identify potential changes to price and value and comparing it with historical levels. Here the accountant needs to pay special attention to major categories such as health insurance and marketing as well.
Incorporating Other Profit Centers
Practices are free to budget ancillary services such as laboratory and optical services just like the main clinic. The same principles apply to these services as well. Variable expenses such as lenses and frames can be calculated on a per-use basis. This amount will vary depending on the anticipated growth of the practice.
Integrating the Budget
The final step to creating a meaningful practice budget is to integrate or compile it similar to profit/loss statement. This can be shown in the form of monthly report that will have data pertaining to results from the prior year. All these information will help monitor the performance of the practice and identify variances to create corrective plans wherever needed.
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