Physicians Practice Pearls: Budgeting for the Fainthearted

October 1, 2007
Kenneth Hertz

Here’s the right way to develop your annual budget.


Not every practice I work with has a budget (for shame). Even those that do often start with last year’s actual financial results, add a percentage, and poof! There’s the budget. So what’s wrong with that approach? It’s not realistic, and therefore, not helpful. Key issues change annually in every practice. You must take this into account, and aim for true, expected goals, rather than just maintaining as before, with a slight across-the-board adjustment. Here’s the right way to budget:

Devise a strategic plan. From that, create an operating plan that supports the strategy.

Write down the assumptions for the year. What are the providers expecting for compensation? How many providers will you have? Will their practice patterns change? Will one be transitioning to retirement? Will another now take two afternoons off per week instead of just one, as he did last year? Are you adding more staff? How will you handle raises? Are you adding Saturday morning hours? And what about the Medicare cuts? What new procedures will the practice do to make up for this shortfall?

Make sure all physicians concur with the listed assumptions. Discuss them all in detail. This will greatly ease the actual budget generation.

Take seasonal variations into account. Your practice’s needs surely shift with the seasons. Make your budget reflect this. Otherwise, it loses its effectiveness if it simply shows an annual figure divided equally by twelve.

Ask a lot of questions. Keep drilling down for details that you can list as assumptions. The more information you have the more accurately you can determine a “price tag” for the year.

Scrutinize last year’s actual (not budgeted) numbers. You may discover bookkeeping errors, which, of course, you don’t want to carry over to the next year’s budget. For example, while reviewing the financial statements of one primary-care practice, I noticed that the costs for insurance seemed awfully high. The general ledger quickly showed me why: The bookkeeper had been posting payments for employees’ health insurance premiums to this category, but also any payments made to insurance companies for overpayments, patient refunds, and so on. Blindly transferring last year’s so-called “actual” figure for this category would have resulted in a gross inaccuracy.

If you follow these steps and create an accurate budget for the upcoming year, bravo! But remember, your budget is only effective if you refer to it regularly. If your management software does not already provide it, create a monthly Actual vs. Budget spreadsheet report. These comparisons will reveal issues needing your attention. Make sure you generate this report by the 10th of each month, as financial performance information tends to reveal problems that have already occurred. Target and resolve issues quickly to keep your finances on track so you’ll achieve your goals for the year. Good luck!

Kenneth Hertz, CMPE, a senior consultant with the MGMA Health Care Consulting Group, has 30 years of management experience in the healthcare industry and not-for-profit sector. He can be reached at khertz@mgma.com or via editor@physicianspractice.com.

This article originally appeared in the October 2007 issue of Physicians Practice.

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