Creating a budget for your medical practice shouldn’t be a painful exercise. But to many, it seems like that.
A budget tells you how much money is coming in and how those funds are being spent.
For your medical practice, a budget is a plan that:
Controls the finances of your practice
Ensures that your medical practice can fund its current commitments
Enables your practice to meet its objectives and make meaningful financial decisions
Ensures that your practice has funds for future projects – such as upgrading IT systems, equipment, renovations, hiring more staff, etc.
A budget supports your medical practice’s yearly business plan and helps you form the strategy and action plan for your business to succeed. It gives you a clear financial picture of where you stand now and where you expect to be in the coming year. Creating a budget is a major undertaking but mastering this one skill can set you and your medical practice for (financial) success.
Factors to Keep in Mind when Creating a Budget for your Medical Practice
Structured planning can make all the difference in the growth and success of your medical practice. It enables you to focus your resources on enhancing patient services, reducing costs and increasing returns on your investment.
Here are a few factors you should keep in mind when budgeting for your medical practice.
1. Set clear goals
Begin with the end goal in mind. How much do you want to grow in the next year? For example, let’s assume $100,000 is your growth goal.
An acceptable return on investment (ROI) level for a marketing campaign goes from 4:1 to 6:1.
Assuming 4:1 ROI in this scenario, to meet your yearly goal, divide $100,000 by 4, which is $25,000. This brings down your monthly budget to approximately $2,000 ($25,000 divided by 4).
By maintaining the ratio between the goal and the budget, you’ll be able to make better financial decisions for your practice.
2. Be realistic
The key to creating a good budget is to set realistic expectations. Operating a medical practice can be unpredictable at times. Therefore, it’s crucial that you know where money can be moved around within your budget.
For example, most practices often use budgets to plan for future business expansion. You can create a special reserve for new business opportunities and save capital from your regular business expenditures into this reserve.
Saving and budgeting for future growth opportunities will ensure that you have ready-to-use capital in hand when you need to make quick decisions or expand business operations. This capital can also come in handy during a slow economic period as a safety net for managing daily business expenses.
3. Be flexible
There may be moments when you realize that a specific part of your budget is not right. Maybe a key piece of information is missing or there has been a significant change in the market that can affect your bottom line.
To use budgets effectively, they need to be reviewed and revised frequently. Using up-to-date data helps you to be flexible and make amends to your budget. This allows you to gauge where you stand presently, what you can afford, and how much is your practice projecting to make.
A Framework to Create a Budget for your Medical Practice
Budgeting is the foundation for all business success. If you have no control over your expenses, then all your planning is futile. And if there is no clear planning, there are no business objectives to achieve. In the words of Zig Ziglar, “if you aim at nothing, you will hit it every time.”
Here are five steps for you to get started with creating a budget for your medical practice.
1. Look at historical data
When starting, look at data for the past three years. Study the monthly financial statements with a clear history of both expenses and income. Examining monthly breakdowns will give you a micro-level understanding of how to plan your expenses and forecast yearly revenues.
Note: If you’re just starting out and don’t have previous data, look for financial reports and studies in your industry to gauge the changing trends over the years. You could also reach out to your fellow doctors who’ve been in the business for a while to get a better understanding.
To get a more macro understanding, look at the quarterly breakdown of your finances. When formulating your budget, consider the following factors:
Increased revenues based on new patients
Better collection percentages
Decrease in medical and office supply costs
Salary increments for physicians and other staff
2. Formulate and review a wish list of purchases
Formulating and reviewing a wish list of purchases will help you bolster the efficiency of your practice and improve its bottom line. When planning this, look at both the clinical and administrative side of things.
Begin by making a broad list and then narrow it down to those items that will help in meeting the long-term goals of your practice. Ask questions such as:
Will these things help increase the overall productivity of your practice?
Will it benefit your patients?
Will these items bring down your long-term costs?
Can you afford it?
3. Invest in insurance and clear policies
To achieve the vision you have for your practice’s growth, you must carve out space in your budget for essentials such as insurance. Doing damage control can cost you a lot more than implementing clear policies and buying insurance for your practice.
While compliance policies and established procedures around staff training and patient care help mitigate certain risks, insurance provides that additional layer of security. Anything from staff behavior to faulty equipment and quality of the facility can lead to liabilities. Here are a few things you should keep in mind when buying insurance:
Start by evaluating your insurance needs
Obtain malpractice insurance
Consider purchasing group health insurance
Get insurance for office liability–in case of any mishap
Purchase WSIB (Workplace Safety and Insurance Board) insurance
Review life insurance for coverage adequacy and increase the coverage if necessary
By investing in insurance and establishing clear policies, you allow your practice to perform its core task–care for patients. Moreover, before you open your door for business, invest some time in forging policies and procedures around the following:
Appropriate staff behavior
Appropriate handling of patient information
Proper management of equipment and facilities
Effective control over administration and fee management
4. Calculate projections for the upcoming year
After assessing all your variable and fixed expenses, you should be able to calculate projections for the upcoming years. You may have to do a detailed cost-analysis on certain departments or specific services. Here are a few things you should keep in mind when calculating your projections:
Your revenue forecast
One of the first factors you must consider when calculating projections is your revenue forecast. For example, let’s assume you receive $40 per patient and you meet with approximately 4 patients per hour. Therefore,
4 patients x 7 hours x 5 days per week x 4 weeks per month x $40 per hour
= $22,400 in revenue per month. In a year that would be $22,400 x 12 months
This is your total revenue without considering any of your expenses.
Once you have your revenue projected, you must make a list of all the expenses and how much they’ll cost you. For example, a few items in this list could be:
Rent of the place
Equipment cost and maintenance
Computers and internet subscription
Some of these expenses might be recurring while a few may be a one-time investment. Once you have all the information for your projection, you’ll get a clear sense of your profit and loss, balance sheet, and cash flow projections
5. Monitor your Budget
A budget is a fantastic tool to gauge your business’s progress. However, it needs to be monitored regularly for optimal performance. As an entrepreneur, you must make it a priority to review your budget and its progress at the end of each month. This will assist you in identifying any fluctuations in the business or in the market and will help you take adequate measures to avoid any complications.
A budget is primarily predictions based on past data expenses and the future revenues so, a bit of fluctuation is expected. A few things you could do to monitor your budget are:
Track your expenses regularly
Compare your practice’s actual finances with your projections
Evaluate your current status, take out learnings, and modify your budget
Creating A Budget For Your Medical Practice
Investing your time and resources in the effort of budgeting, just like investing in any other management practice, results in a smoother and more profitable practice. The objective should be to interlink the long-term vision of the practice with the budget. It’s difficult to increase your budget without a clear plan that outlines a high return on investment.