Look beyond next year!
This article begins our series on budgeting for your chiropractic practice. We’re starting now so it concludes this fall, when you can use it to develop your practice’s 2006 budget.
So many chiropractors have no budget, no plan. We bill and hope to collect. If we don’t collect, we borrow. Borrowing leads to debt; debt creates stress. Your overhead should not exceed 50% and you should have a reserve on hand in case of emergency. Plan your budget; follow your plan.
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. The dual purposes of operational and strategic planning lie at the core of this series. This first article provides an overview of the budgeting and planning process, including the basic budget components, which we’ll address more fully in coming issues.
Look further ahead
Chiropractic practice budgeting is more than a series of annual targets. The effective planning process considers strategic issues for the coming five, or even ten years. Before your manager or administrator can “run the numbers,” the physician owner(s) must decide where you want them to run to in the coming years. If your budgeting and planning efforts don’t project beyond the coming year, schedule such planning sessions. Otherwise, it’s like building a bridge from one riverbank with no knowledge or concern of what’s lurking on the opposite shore. That’s exploring, not planning. When consulting with any client, the first question I ask is, “What are your goals?” Goals and planning are synonymous. When planning and setting goals, you must ask yourself difficult questions. However, the answering of these questions is the first step toward setting your goals and following your plan.
Ask yourself 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?
• Do you want to add an MD?
• Do you want to add a PT?
• Do you want to add technology, e.g., LPG, DRX, AST?
• Are you ready for a consultant?
• Can you do it on your own?
• If so, how? Should you add physicians? Increase your geographic market, perhaps with an additional office? Should the practice introduce new services you’ve referred out in the past?
• What competitive threat exists—or is likely to develop? How can you react to it, or eliminate it by acting now?
Budget mechanics
Next, begin the traditional budget mechanics. Have your manager start using the budget framework to attach numbers to the agreed ideas and goals. We’ll look at the different budget components in greater detail in the coming months:
1. Revenue budget. Looking at past data and projecting forward, how much revenue does the practice expect from cash payments? And what about managed care plans, prepaid HMO contracts, patient co-pays and Workers Comp, PI, receivables on the books and the prospective sale of any assets? Well-researched revenue budgeting explores all likely income sources.
2. Expense budget. The health care services you render cost money to provide. You must meet fixed, variable and “semi-fixed” expenses to keep the doors open and the revenue coming in. What percentage of your revenue goes toward marketing? When I ran NutriSystem as the President of NASDQ CWC, we ran in the range of 7%. A budget should have a formula.
3. Capital budget. Small and mid-size practices (even many larger ones) rarely develop capital budgets. Nor should they. If a practice doesn’t own its office (even though a related partnership often does), many traditional capital expenditures fall outside the practice budget. Plus, by borrowing funds for capital purchases, like new clinical equipment, you essentially transfer them into regular budget items. But for larger practices, capital budgeting can be an important part of the overall process and an alternative to borrowing.
4. Profit plan. This integrates the revenue and expense budgets to show net income for the practice. Some groups even start the budgeting process by deciding what take-home pay their doctors should receive and then work back up the line to project the revenue needed to produce that profit.
5. Cash budget. The cash budget details the anticipated cash flowing through the practice. Net charges and actual revenue don’t march in step. Prepaid contracts, workers compensation and outside referrals can create a significant short-term difference between what you’re due and what you actually receive. And cash outflows, like malpractice premiums and meeting travel, may vary significantly from month to month. The cash budget helps keep you on top of your practice’s monthly cash needs.
6. Balance sheet. The balance sheet puts all the revenue and expense data together and projects the practice’s assets and liabilities—essentially a snapshot of the practice’s financial health—at the end of the budget year.
7. Review, revise. After you put the collected information into an initial draft, the crucial review process begins. Are the numbers accurate to the best of your forecasting ability? Are the forecasted results good enough to support the practice and meet the needs of the physician owner(s)? If you project these numbers into the future, will the practice likely stay on track toward achieving its long-term goals? Was anything inadvertently left out?
Project some problems
Consider the financial implications of falling a little short—or a lot short. That raises the issue of whether a budget should represent your best projection of what will likely happen, a “stretch” goal to strive for, or a near worst-case scenario that will still meet the needs of the physician owner(s). We’ll focus on that issue next month when we examine the planning process.
Regardless of the approach you choose, instruct your manager to run some good, bad and middle-of-the-road scenarios, so you know what to expect if the unexpected happens. But, if you carefully gather your information, project reasonably and don’t get blindsided by external changes, budgeting shouldn’t provide too many surprises. And that’s the point of the entire process.
The road to success is always under construction. The more 3rd party dominates your practice, the more likely you will end up with some bad months. This is why you need to add a cash component to your practice. Make sure you have a reserve and, remember, it’s not for that new BMW. Try to keep your payments down and your practice up.