Don't Need A Budget? Think Again!
Top 10 reasons why most practices don't have a budget
A critical first piece to the financial management puzzle is preparing an annual budget; unfortunately, many medical practices don't. PMSCO Healthcare Consulting responds to the top 10 reasons why most practices don't have a budget.
- There's always enough money in the bank.
- Don’t want to follow one. Want flexibility.
- Never did it before. Predecessors never did it.
- Huge distraction that serves no real purpose.
- Always precedes layoffs, pay cuts, and general belt tightening.
- Only for irresponsible people who don’t make a lot of money.
- Never seen one put to good use in or outside of medical school.
- No clue how to do it correctly.
- Can’t trust the numbers in a budget. Someone is pulling them out of thin air.
- Won’t help patients, make staff happier, or cut down on hassle factor.
Reason #1: There's always enough money in the bank.
Response: Can’t get too much of a good thing.
Many medical practices don't even consider managing finances until there's no money in the bank to make payroll or pay the monthly bills.
Some practices are more fortunate and don't have significant cash flow issues. However, there's usually room for improvement.
Discovering problem areas early and implementing solutions can result in even more cash in the bank. Who doesn’t want extra money to use to purchase that new piece of equipment, renovate the waiting room, or boost morale by giving bonuses?
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Reason #2: Don’t want to follow one. Want flexibility.
Response: Not set in stone.
A budget is simply a guideline or an expectation of financial performance. It's not meant to be a rigid document that you must follow to the letter.
In fact, actual results will rarely, if ever, exactly match budgeted results. Timing of receipts and disbursements are often difficult to predict and unexpected items also come up. These and other extenuating circumstances may impact actual results.
Use the budget as a tool to compare actual financial results against budget. Investigate the reasons for significant variances that will allow you to make informed, financial decisions for the remainder of the budget year.
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Reason #3: Never did it before. Predecessors never did it.
Response: Think outside the box. How many times have you heard “we’ve always done it that way”? This mentality isn't productive. The only way to progress or make improvements is to think outside the box.
The budget process alone will get you thinking about health care market trends and how your practice will thrive in that environment. It could prove insightful and perhaps even conjure up revenue-generating or money-saving ideas.
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Reason #4: Huge distraction that serves no real purpose.
Response: A multitude of uses. In truth, the budget process does require time and effort. However, there are many good reasons for doing it.
A budget is a critical first step in understanding your practice’s finances. It's also useful in making business decisions such as adding additional staff, purchasing equipment, or switching supply vendors.
Measuring actual financial results against budget may help identify operational issues. This allows you to be proactive in implementing solutions before things get out of hand.
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Reason #5: Always precedes layoffs, pay cuts, and general belt tightening.
Response: Stretching the dollar. Developing a budget is not necessarily about cutting costs and tightening the belt. You should view it as a mechanism for determining the impact of anticipated changes in your practice’s revenue and expenses.
For example, there may be circumstances that will affect revenue sources in the coming year.
- What impact will decreased reimbursement from payers have on the practice?
- Should you consider other service lines as revenue sources?
- What impact will the addition of a physician assistant have?
A budget also makes it possible to identify unnecessary spending that can be better utilized for other things. Perhaps, with the money saved by eliminating a publication that sits on the shelf, you could send a staff member to a training seminar.
There's no doubt that you can use a budget to determine where to shave expenses, but it's also useful in shifting funds to get more bang for the buck.
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Reason #6: Only for irresponsible people who don’t make a lot of money.
Response: Control your financial destiny.
A budget is a tool to help prioritize spending and manage money—no matter how much or how little. Just as in personal finances, those who manage income and expenses are typically more financially stable.
Often, practices don't discover financial difficulties until the end of the year when reviewing financial statements and realizing they've incurred losses.
Take control of your practice’s financial destiny by developing a realistic budget and periodically monitoring performance, before it’s too late!
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Reason #7: Never seen one put to good use in or outside of medical school.
Response: Would you build a house without a hammer?
A budget is a basic tool that every business, including medical practices, should have in order to successfully manage finances.
Just as it would be difficult to build a house without a hammer, it would also be difficult to effectively measure a practice’s financial performance without a budget.
Budgets are also useful in determining the feasibility of expanding service capabilities and adding extraordinary items. For example, a practice may be considering hiring an additional physician. By plugging in estimated revenue and associated expenses, a budget will show the impact to the practice’s bottom line.
When doing this type of analysis, it's important to keep in mind all of the variables.
- Will the physician be bringing an established patient base or starting from scratch?
- Will you need additional staff?
- Can the current office space accommodate another physician?
- What will the additional malpractice insurance expense be?
- What impact will another physician have on supplies and other operating expenses?
- How will you structure the physician’s compensation?
You should evaluate all of the factors that contribute to the bottom line, prior to moving forward.
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Reason #8: No clue how to do it correctly.
Response: Where to start? Generally, there are four steps to the budget process:
- Gather information on anticipated changes in the market and in your practice operations. Develop assumptions based on this information combined with historical practice data.
- Utilize the information gathered during the planning process to develop and create an annual budget. Break down the annual budget into a monthly format.
- Measure performance by comparing actual monthly financial results against budget and investigating significant variances.
- Finally, once discovering the causes of variances, implement solutions to keep the variances from growing wherever possible.
In the event you're still scratching your head, there are useful tools available in the market to assist you in creating a budget.
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Reason #9: Can’t trust the numbers in a budget. Someone is pulling them out of thin air. Response: Fact or fiction?
As previously mentioned, actual results rarely match budgeted amounts exactly. However, you should develop your budget using actual historical and market information. You shouldn't pull the numbers “out of thin air”; instead, they should reflect a reasonable depiction of the expected revenue and expenses for the budget period.
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Reason #10: Won’t help patients, make staff happier, or cut down on hassle factor.
Response: Put a smile on! A medical practice that is financially stable will make everyone happier.
Staff morale will typically be better because employees are not constantly worried about penny-pinching and staff cuts. Patients will be happier because the office is generally more organized and staff is more attentive.
Overall, the hassle factor is much lower because the staff and physicians can focus on patient care, rather than worrying if there's enough money in the bank to pay the bills.
Bottom line: no more excuses.
Develop your practice’s budget now. It's the foundation on which to begin solving the financial management puzzle medical practices face today and in the future.
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Source: Content of this Web article courtesy of PMSCO Healthcare Consulting, a subsidiary of the Pennsylvania Medical Society, which provides a full range of health care consulting services to physicians, hospitals, third party payers and other health care organizations. For more information, go to www.consultpmsco.com.
Last Updated: 8/28/2007