The Practicon Viewpoint by Ann Page Griffin

HOW DO I BEGIN THE BUDGETING PROCESS FOR MY PRACTICE?

The bottom line in any business, dental practices included, is profit

Profit is not the dirty word some would have you believe it is. Remember: one cannot give from empty pockets to help others, and the business that produces no profit soon closes its doors. There are two ways to increase profitability: produce more and spend less.

Control of expenses (spending less by adherence to a well-planned budget) is one of the most underutilized, yet valuable, tools to increase profit in any business. Those dollars earned and collected but not spent go directly to the bottom line.

The discipline of writing and sticking to an annual budget is like a GPS, a guide to the financial health of your practice. The first year a budget is written and executed is the most difficult. With experience, you’ll get more accurate in your predictions.

Steps to creating a budget:

• In September or October, project totals for this year's production and collections.
• Review the year-to-date Income and Expense (Profit and Loss) statement line by line, deciding by percentages translated into dollars what the increase or decrease (savings) in each line item will be for next year.
• Make decisions such as:
• Fee increase?
• More staff to be hired?
• Capital investments to be made? New computer system? New dental equipment? Office refurbishment?
• Set goals for increases in both production and collections, perhaps an 8% to 10% increase in production and a 3% to 4% increase in collections (the ideal collection rate is 97% of net production) for next year. (Note: the budget is predicated on collections; after all, one cannot spend production).
• Forecast the annual net collection goal for next year. Collections must cover overhead, plus the doctor's compensation, including retirement funding, plus debt service, plus net profit/doctor's bonus/ROI.
• Put the annual budget in final written form, thereby recording and committing to a projection of production, collections, and expenses.
• Divide the newly projected totals of each expense line by 12 months to determine a monthly allowance for each.
• Beginning in January of next year, analyze each month’s I&E/P&L statement, justifying overages or savings in each of the seven categories of expense: Personnel, Occupancy, Administrative, Clinical Supplies, Lab, Equipment/Furnishings/Contingency/Emergency Fund, and Marketing.
• Make adjustments in projected expenditures no more often than quarterly, changing the next quarter totals to meet new expectations based on information from the current or previous quarters.
• Share sufficient information with staff members so they can help plan, produce, collect, save, and understand why fee increases are necessary.

One way to share financial information with your team is to calculate the daily cost of each of the seven categories listed above. For example, if annual staff compensation, including wages and benefits, was $288,000 last year with 190 work days in the year, the personnel cost was $1,516/day. Add to this the daily cost for the other six categories of expense, and it's not unusual to find that overhead expenses run several thousand dollars per day, not including any compensation for the dentist(s).

Knowledge of the total daily costs for running the practice helps staff members understand the necessity of production goals, the 97% or better collection rate, and fee increases.