By James T. Krupienski, CPA
Each year, we hear of practices continuing to stress over falling reimbursements and rising costs. Yet, all too often, the year-end financial results of a medical practice still come as a surprise to its owners and management.
The effective use of a financial budget can help alleviate many of the financial unknowns as practices progress throughout the year.
Budgets can come in many variations, depending on the size, needs, and complexity of the practice. What they all have in common, however, is the ability to monitor and watch financial results as they occur during the year. This allows a practice to make real-time adjustments earlier on, leading to improved financial results.
This article will provide some insight into why a practice should create a budget, how it may be broken down into different categories, and the process of review and revision.
All practices should consider an annual budget from an ongoing financial-management perspective. The budget is one of the best tools to understand financial trends within your practice, both from a revenue-generation perspective and a cost-management perspective. Additionally, there are certain operational triggers that should be considered when evaluating the need for a budget. These triggers most often include the creation of new revenue-generating areas or when the practice is considering expansion to new locations. Determining why the budget is being created is the first step in its development.
The second step is determining whether it will be a historical or zero-based budget.
Historical budgets are based on the comparison of results from a previous period and are adjusted up or down based primarily on patient volume. Zero-based budgets are those that start from scratch with no historical look-back. Zero-based budgets are a good tool for either a new practice or a practice starting a new revenue stream, whereas historical budgets are good for those with no major changes on the horizon.
Financial budgets will then have two main components — revenues and expenses. Revenues should be budgeted at a level consistent with the primary revenue streams of the practice. As it relates to patient revenues, consideration should be given to use of collections or charges and adjustments. In either case, they should be based off, and referenced back to, an analysis of patient volume and visits.
In budgeting expenses, it is important to understand that they will be broken down into variable and fixed costs. At a high level, variable costs are those costs that are tied in with the volume of the practice and patient visits. Examples include medical supplies, office supplies, and clinical wages. Proper budgeting of patient volume and visits is critical to ensuring that variable costs are accurately budgeted. Fixed costs are those the practice is obligated to pay, regardless of patient volume. Examples of these include rent, management salaries, and many equipment-lease expenses.
As noted previously, budgets can take many shapes and sizes. They can be sliced and diced into many categories and subcategories, depending on what makes the most sense for the practice. As needed, budgets can be broken down by locations and service lines.
For those budgets that are based on practice locations or service lines, revenues should be allocated as appropriate to the revenue stream being categorized. Expenses can be a bit trickier and require much closer inspection. Here, there is no one-size-fits-all categorization approach. First, expenses should be budgeted at the overall practice level. From there, the expenses should be categorized and allocated based on what makes sense for the practice and the nature of the expense line item.
Items such as rent and utilities can be categorized by the actual location or square footage of an area being used. Clinical salaries can be allocated based on patient volume or direct coding of the patient visits, whereas office and administrative salaries can be shared based on patient volume of an area, or allocated based on an estimate of time being devoted to the area.
Review and Revision
With the budget now created, the biggest question is ‘what do you do with it?’ Preparing a budget is a waste of time and effort if it is not reviewed. At a minimum, actual results should be compared to budgeted results on a monthly basis.
Discrepancies should be reviewed and discussed with the full management and ownership team. It should be determined if a variance is a timing difference or a trend. Timing differences should be noted and monitored month to month to ensure that they work themselves out. Examples of this are upfront payments for insurance premiums or a month containing an extra payroll.
Trends are more worrisome, especially if they are relative to declining revenues or additional expenses. Here, the management team should discuss and review the causes of trends in full. Is it something that can be mitigated?
If staff and clinical wages are trending higher than budgeted, is overtime being monitored and managed, or is it tied in with increased revenues? If office expenses are trending high, are purchases being reviewed and approved, or was there a rate change with a vendor? All of these trends should be reviewed and discussed as a team. This way, everyone is vested and understands the impact on the bottom line.
Creation of a realistic budget will provide the tools necessary for management to monitor trends and variances throughout the year. For those practices that have not prepared a budget in the past, it is never too late to start.
Even midway through the year, as we are now, creating a budget can help shore up financial results and avoid surprises come December. If you have any questions about establishing a budget for your practice, or improving upon the budget-analysis tools you already have in place, be sure to contact your accountant.
James T. Krupienski, CPA is a partner with Holyoke-based Meyers Brothers Kalicka, P.C.; (413) 536-8510.