Financial Management for Future Freedom
Practice Management
Written by Dr. Eric Kaplan, D.C., F.I.A.M.A.   
Saturday, 30 November 2002 00:00 Read : 869 times

BUDGETING & PLANNING
Budgeting includes short- and long-term plans

Look beyond next year!

This article was written to help you on budgeting for your chiropractic practice.  We’re starting now to develop your practice’s 2003 budget.  It amazes me how many doctors spend more than they make.  We are fortunate to drive luxury cars, live in large homes, 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 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 this age old wisdom.  Budgeting can make life less stressful, if done properly. 
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 article. 

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 ten years.  The first key is to remove or eliminate debt.  Before your accountant, your manager or administrator can “run the numbers,” you 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 for what’s lurking on the opposite shore.  That’s exploring, not planning.
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?”  My goal, as a consultant, is always to help my doctors grow, while keeping their prospective overheads 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 like:

  • Do you want to make the practice larger?
  • If so, how?  Should you add physicians—physical therapist, nurse practitioners, massage therapist, another DC, an MD—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 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 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 self-pays, receivables on the books and the prospective sale of any assets.  What about PI or Worker Compensation?  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.  One objective is for your overhead never to exceed 50%.  Have your accountant provide you with P/L’s on a regular basis.  Have each category earmarked by percentage.  (Example:  Advertising should comprise in the range of 6%, employees in the range of 25%, etc.)
  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.  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 take-home 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, Dr. Larry Markson, taught me a long time ago, “Pay yourself first.”  I have always followed this philosophy.
  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 out.  You need to calculate what your collection percentage ratio is.  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.  And cash outflows, like 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, 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, 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 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 don’t get blindsided by external changes, budgeting shouldn’t provide too many surprises.  And that’s the point of the entire process.
Your goal should be to maintain your overhead at 50%; every month you should evaluate your P/L.  Many doctors get into financial crisis because they do not have an effective budget or savings system.  I recommend to all my clients that they 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.  Throughout our journey there will be obstacles, so be prepared.  Periodically, you may make a wrong turn.  Get back on track.  Financial freedom takes time, energy, effort and, most of all, discipline.  With proper preparation you can build your future by starting today. 
Good luck; I’ll see you “At the Top”. TAC


Dr. Kaplan is the CEO of MBA, Inc., one of the nation's largest multi-specialty consulting companies.  Dr. Kaplan ran and operated five  of his own clinics, seeing over 1000 patient visits per week.  He is the best-selling author of Dr. Kaplan’s Lifestyles of the Fit and Famous, endorsed by Donald Trump, Norman Vincent Peale and Mark Victor Hansen.  He was a recent commencement speaker at New York Chiropractic College and regularly speaks throughout the country.  For more information about Dr. Kaplan or MBA, call 561-626-3004.


 
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