Preparing a Budget for the New Year

Plan where your money and your practice are going

 Budgeting is your financial map. A good budget encompasses all the financial details of running your practice. “Good budgeting” goes fur­ther and projects how those details will help achieve your and your practice’s larger, long-term goals. Strategic questions like, “What do we want to be doing in five years?” produce natural operational ques­tions like, “What will we do next year to put or keep us on that path?”

This strategic planning step in­volves questions about internal (physi­cian goals) and external (competition and other market forces) factors like:

• Do you want to make the practice larger?
• How can you keep the cost of malpractice insurance from strangling your practice?
• Should you add physicians? Or increase your geographic mar­ket with an additional office?
• Should the practice introduce new services you’ve referred out in the past?

Where to start

Budgets usually work best when they reflect what the management team genuinely expects to happen in the coming year — especially if the team is new to formal budgeting.

That said, you’ll probably want your manager to run some optimistic, pes­simistic and middle-of-the-road sce­narios so you know what to expect if the unexpected happens.

Start your budgeting process by looking at what you’ll take in as revenue. That’s prob­ably the most important — and most conjec­tural aspect of the entire effort. Experi­enced budgeters can ef­fectively use revenue projections to set growth goals for com­ing year(s). Planning for continued growth keeps the pres­sure to produce on physicians and employees — particularly when they’re included in a performance-bonus pool.

If you’re just starting out with budgets, begin with only the upcom­ing year. Make your first effort as straightforward as possible. While so-called stretch goals might moti­vate competitive doctors, you can kill any enthusiasm for the entire budgeting process if you set targets too high and spend the whole year “behind budget.”

Keep it real

If you do build stretch goals into your budget, base them on some­thing realistic. When you budget new revenue, make sure there’s an achievable source, such as adding new services, opening a satellite office or hiring a new provider. Don’t budget a 20% revenue increase in 2003 if you’re basi­cally planning to do the same things you’re doing in 2002. That’s just wishing for growth.

The same idea ap­plies to expenses. There’s no sense in budgeting a 5% reduction in ex­penses without some plan for achiev­ing that objective.

As you become more comfortable with the process, budget further into the future. The long-term numbers won’t be precise, but they’ll help you keep sight of your goals. Suppose your group wants to expand from a single site to three offices within three years. How are you going to pay for it? Long-term budget plan­ning shows the path to that expan­sion objective.

Use it!

Don’t just create and forget about your budget until you begin the pro­cess again next year. Track it monthly and measure your progress. Examine discrepancies to find their cause. By doing so, you’ll steadily de­velop a more complete understanding of your finances.