Financial Management: The Key to Future Freedom
PRACTICE MANAGEMENT
CONCIERGE COACHES BUDGETING & PLANNING
Budgeting includes shortand long-term plans
Eric Kaplan
Look beyond next year
I not only love writing for The American Chiropractor, I also enjoy reading the articles. I enjoy the many philosophies they offer on a monthly basis. To succeed in practice, you need ongoing preparation. This week’s letter was written to help you on budgeting for your chiropractic practice. Now is the time to start to develop your practice’s 2015 budget.
It amazes me how many doctors spend more than they make. We are fortunate to drive luxury cars, live in large homes, and take great vacations, but we must do this only if it fits into our budgets. Debt can create stress, and stress can cause us to make improper decisions. By removing debt, we remove most of our practice’s stresses. My father used to say that the key to being successful is to spend less money than you make. Unfortunately, many doctors do not follow such wisdom. Budgeting can make life less stressful if done properly.
A good budget encompasses all of the financial details of running your practice. Good budgeting goes further and projects how those details will help achieve your practice’s larger, long-term goals. The dual purposes of operational and strategic planning lie at the core of this article.
and projects how those details will help achieve your practice’s larger, long-term goals. 5 Ï
Look to the future
Chiropractic practice budgeting is more than a series of annual targets. The effective planning process considers strategic issues for the coming five or even 10 years. The first key is to remove or eliminate debt. Before your accountant, manager, or administrator can “run the numbers,” you must decide where you want the numbers to run 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 to another with no knowledge or concern of what’s lurking on the opposite shore. That’s exploring, not planning.
Strategic questions such as, “What do we want to be doing in five years?” produce natural operational questions such as, “What will we do next year to put or keep us on that path?” Our goal at Concierge Coaches has been to always help doctors grow while keeping their prospective overhead under control. You can grow your practice while maintaining a certain percentage overhead.
This strategic planning step involves questions about internal (physician goals) and external (competition and other market forces) factors, such as:
• Do you want to make the practice larger?
• If so, how? Should you add physicians, physical therapists, nurse practitioners, massage therapists, another DC, or an MD? Should you add decompression, laser, weight loss, or massage? Or increase your geographic market, perhaps with an additional office? Should the practice introduce new services you’ve referred out in the past?
• What competitive threats currently exist or are likely to develop? How can you react to them or eliminate them by acting now?
Budget protocols
Next, begin the traditional budget mechanics. Start using the budget framework to attach numbers to the agreed ideas and goals. We’ll look at the following 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? What about managed care plans, prepaid HMO contracts, patient copays and self-pays, receivables on the books, and the prospective sale of any assets? What about personal injury or workers’ compensation? Well-researched revenue budgeting explores all likely income sources.
2. Expense budget. The healthcare services you render cost money to provide. You must meet fixed, variable, and “semifixed” expenses to
keep the doors open and the revenue coming in. One objective is for your overhead to never exceed 50%. Ask your accountant to provide you with profit and loss statements (P/L) on a regular basis, and have each category earmarked by percentage. For example, advertising should comprise in the range of 7%, employees in the range of 25%, etc.
3. Capital budget. Small and midsize 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’s budget. Plus, by borrowing funds for capital purchases such as new clinical equipment, you essentially transfer them into regular budget items. For larger practices, though, capital budgeting can be an important part of the overall process and an alternative to borrowing. This should be part of your overall planning and should be done carefully with your accountant as part of your tax planning.
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 takehome pay their doctors should receive and then work back up the line to project the revenue needed to produce that profit. One of my mentors taught me a long time ago to pay yourself first, and I have always followed this philosophy.
■ ^ You must plan for the unexpected. Remember, if you carefully gather your information, project reasonably, and aren’t blindsided by external changes, then budgeting shouldn’t provide too many surprises. ÏÏ
5. Cash budget. The cash budget details the anticipated cash flowing through the practice. Net charges and actual revenue don’t march in step. Rarely do clinics collect what they bill. You need to calculate your collection percentage ratio. I provide this to my clients on a monthly basis. If your practice bills $500,000, and you collect $300,000, then you have a 60% collection ratio and a $300,000, practice. Prepaid contracts, workers’ compensation, and outside referrals can create a significant short-term difference between what you’re due and what you actually receive. Cash outflows, such as malpractice premiums and meeting travel, may vary significantly from month to month. By knowing what you anticipate as your collection percentage, this budget protocol helps you stay 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. Remember that a fall is a fall. Falling of any nature is not a comfortable situation, yet it happens. That raises the issue of whether a budget should represent your best projection of what will likely happen (i.e., a “stretch” goal to strive for), or a near worst-case scenario that will still meet your needs.
Regardless of the approach you choose, it is your responsibility to work with your accountant to run some good, bad, and middle-of-the-road scenarios so that you know what to expect if the unexpected happens. Computers break down, employees get sick, and even doctors can miss work. You must plan for the unexpected. Remember, if you carefully gather your information, project reasonably, and aren’t blindsided by external changes, then budgeting shouldn’t provide too many surprises. And that’s the point of the entire process.
Remember, your goal should be to maintain your overhead at 50%, and every month you should evaluate your P/L regularly. Many doctors get into financial crisis because they do not have an effective budget or savings system. I recommend for all of my clients to save 10% per week. Call it tithing for success.
The road to success is always under construction.
Success is not our birthright; we must work and plan for it. Throughout our journey, there will be obstacles, so be prepared. Periodically, you may make a wrong turn, but you can get back on track. Financial freedom takes time, energy, effort, and mostly discipline. With proper preparation, you can build your future by starting today. Good luck, I’ll see you “ow the top”
Dr. Eric S. Kaplan, a former President COO of a NASAQ traded public company, which included Nutrisystem, Currently he is CEO of Concierge Coaches, Inc., Mwvw.conciergecoctches. com, a comprehensive coaching firm with a successful, documented history of assisting doctors create profitable practices nationwide, providing over 30 New Patient marketing Programs. Dr. Kaplan is a member of the adjunct faculty at Parker. Parker University now offers a National Certification course on spinal decompression. For more information on coaching or spinal decompression, call 1-561-626-3004.
