STEPS TO WRITING A BUDGET

Operating your practice using a budget is a discipline, an excellent habit.  Writing an annual budget for your practice and sticking to it is a vitally important step in meeting financial goals.  A budget is like a GPS, alerting you throughout the year to the practice financial status and course corrections needed to stay on track to maximize profit.

A budget is a cash plan that allows better use of practice income.  In November or December of each year, the budget for the following year should be written.  However, if you miss that end-of-year period, go ahead and commit to a budget in January or February while most of the year is still ahead of you.  Keep in mind that a budget is not carved in stone; figures can be adjusted at the end of each quarter if predictions for any expense is significantly (more than 10%) over or under the budgeted amount.  The first year is the most difficult.  With experience, you will get more accurate in predicting income and expenses for each subsequent year.

Steps to writing an annual budget: 

·         Late in the year, project totals for the current year’s production and collections.

·         Set a goal for increase in both production and collections, perhaps 5% to 10%, for next year.

·         Break expenses for the current year into seven categories:      

Personnel, not including Dr(s). compensation

Occupancy, including lease or note payment, utilities, janitorial, maintenance and repairs, etc.

Administrative, including computer operation, office supplies, telephone, taxes, insurances, etc.

Equipment, furnishings, contingency fund (minimally three months’ cash to keep the office open in case of emergency/crisis)

Clinical supplies

Lab

Marketing

·         Make major decisions about the practice for next year, e.g.  

           Fee increase    

           Additional staff?

           Capital investment in building improvements or new equipment? 

·         Review the year-to-date Income and Expense (Profit & Loss) Statement line by line, deciding how much each cost will increase or decrease (cost savings) next year.

·         Divide the newly projected totals of each expense line item by 12 months to determine a monthly allowance for each.

·         When each month’s I&E/P&L statement is completed, analyze and justify overages or savings in each of the seven categories of expense.

·         Make adjustments (increase or decrease) in budgeted expenditures no more often than quarterly.

·         Share sufficient information with your staff so they can help plan, produce, collect, cut costs, and understand why fee increases are necessary.

·         Total Dr(s). compensation should be projected also so that the total overhead costs plus Dr. compensation = next year’s collection goal.  Collections in excess of total overhead plus Dr. compensation may be a bonus for the owner, used to reduce debt, or added to the Contingency Fund.