Budgeting 101

May 01, 2005

Most medical practices have some financial problems - and clearly many are in severe distress. Think of your practice's budget as a mini business plan covering this year and next.

"My husband has had a solo family practice for almost eight years. Last year the bottom seemed to fall out of the business. We are in a terrible pattern of going broke."
 - Brookhaven, Miss.

"We have over 5,000 active patients and collect over $800,000 a year, but we are still scraping by on a month-to-month basis."
 -  Cary, N.C.

"Our physicians were not aware of the serious danger of bankruptcy that our practice was in, and as nonbusiness people, we had not taken the responsibility to be involved."
 - Scottsdale, Ariz.

These are just a few examples of real stories from practices who've written to Physicians Practice looking for help. Most medical practices have some financial problems - and clearly many are in severe distress. But what business owner doesn't wonder: Why aren't we making as much money as we used to? Are we overstaffed? Spending too much on supplies? And here's a hard one: are we working hard enough?

Many practices I've worked with can't begin to answer these questions because they don't have a well-planned budget in place that is monitored regularly. Some physicians think their practice is too small to need a budget. Some think they are budgeting by simply comparing last year's numbers to this year's. Others feel that so much of their business is controlled by outside influences, preparing a budget is a waste of time. Wrong on all counts.

Think of your practice's budget as a mini business plan covering this year and next. This helps you establish a plan and adds a level of discipline to operations and spending. Planning allows you to put additional services in place, eliminate money-losing activities, and discover and fix inefficiencies.

Money in, money out

At its essence, a budget is a tool to measure and track revenue and expenses. While expenses are vital to the process, revenue's where it all begins. After all, the only reason to incur expenses is to support revenue-generating activities.

When planning the revenue side of the budget, consider:

  • The number of office visits and procedures that are required to meet your practice's earnings goals. This will, in turn, affect the expense side - things like staffing levels, the facility (overhead as well as the amount of space you need to accommodate your volume), and supply expenses. If you are planning long-term changes in the level of patient visits or procedures, plan likewise for changes in staffing and other expenses.
  • Services you might add that are more profitable or that will attract more desirable patients. Along with this, consider how marketing efforts or changes in technology, staffing, equipment, or payer contracts will be affected. Be certain that a new service will pay in the long term, not cost you before you add it.
  • Services that will be reduced or eliminated because of changes in staffing, payer contracts, or competition. For example, suppose the practice is considering dropping some unfavorable contracts because the administrative work is too great to collect your money.

To compare changes related to additional or reduced services, put together your usual budget - Option 1 - along with another version - Option 2 - that would include increases or decreases in revenue and corresponding changes in staff and supplies.

Managing expenses is a core part of your budget - and most practices do pay attention to expenses. Keep in mind that expenses should only be incurred because they generate revenue or are required by law.

Consider the following when preparing the expense side of your budget:

  • Changes in routine expenses that will occur because of price changes, expected changes in patient volume, or changes in practice contributions to profit sharing.
  • Increases or decreases in support staff salaries and benefits because of changes in staff levels or changes in the compensation plan.
  • The addition of new equipment or vendor services such as medical equipment, computer software or hardware, copier service or other contracts. For new services, develop an "Option 2" budget that includes not only the anticipated additional revenue but the lease expense for the new equipment, the addition of a technician, and related expenses like the conversion of an exam room to a procedure room.
  • Decreases in expenses resulting from expired maintenance or service contracts or loan/lease payoffs.
  • Establish processes so that staff cannot purchase supplies and equipment without oversight.
  • Understand the negative effect of physician time off on cash flow. I know of one four-physician practice in which three physicians took two weeks off during the same month. They had to borrow money to make payroll about 45 days later.

In short, be sure to coordinate revenues and expenses - changes in one area affect other areas. If the practice plans to increase revenue through marketing, make sure the marketing expense budget is increased. If you expect to see more patients, make sure the medical and business supplies and operating expense items like overtime are increased. Don't overlook revenue and expenses that are not spread evenly over 12 months, such as occasional educational conferences.

The devil in the details

Finding the right level of detail for your budget is a balancing act: Too little detail and trouble spots won't be apparent. Too much detail and it's hard to analyze and make decisions.

Line items in a budget should be at a level of detail required for appropriate data collection, analysis, and decision-making. For example, budgeting and reporting "medical supplies" as one line item is not likely to reveal that the cost of one item has gone up if staff has been getting good prices on 20 other items.

Give separate lines in the budget to items that are significant because of volume, unit cost, discretionary use, or that are controlled by more than one person. Use separate revenue lines for each physician, and consider separate revenue lines for office visits, office procedures, and hospital procedures for each physician.Distribute sections or even single budget line items to those who are responsible for controlling the items. If the supervising nurse or receptionist is responsible for ordering medical supplies, that person needs to have all the budget lines for medical supply items.


Your bookkeeper must also have a copy of the entire budget so she can set up the records to match the structure of the budget and be able to report it consistently on a monthly basis. For example, office supplies for the clinical department cannot be reported as "general office supplies" one month, then "clinical supplies" the next.

A living document

A budget that is well-planned and then filed away until the next budget cycle or the annual meeting is useless. It must be an active management tool that involves many people in the practice. The physicians should not dictate a budget to the office manager, and management should not be expected to develop a budget without a great deal of interaction with the physicians. The staff should also contribute ideas since they are involved in the day-to-day tasks physicians may not be tuned in to. Your accountant will need a copy to format the information into financial statements, physician reports, and for preparing tax returns.

Establish a routine for reviewing actual budget data against the projected budget and acting on variations. The best forum is a monthly meeting of the physicians and practice management. If there are significant variations in the data, the person responsible for that section or line item in the budget should be brought in to discuss the issue.

If you discover you've got a bad budget, don't just stick to it. If an item was badly estimated or an item was unrealistic or circumstances have changed, modify the budget. And keep in mind that "good" variations can be a sign of trouble. For example, if expenses for medical supplies are lower than budget, it could be that you have a bargain-hunter on your staff - or that the person responsible is not ordering enough supplies for your practice's needs.

Paul Angotti is president of Management Design, LLC, a company that helps physicians to establish and maintain financial and operational control of their practices. He can be reached at angotti@management-design.com or editor@physicianspractice.com.

This article originally appeared in the May 2005 issue of Physicians Practice.

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