A skill not typically taught in medical school or during residencies, the task of planning a budget for a medical practice can come as quite a shock to many new doctors. Medical practice budgeting is an element easy to overlook in the early and exciting stages of establishing oneself professionally.
Medical practices without budgets end up facing a multitude of problems down the road. These include everything from embezzlement, over- or under-staffing, supply waste, inappropriate purchasing, compensation debates, inadequate savings for practice improvements, and, last but certainly not least, higher-than-necessary income taxes.
With that in mind, there’s not much argument when it comes to establishing that budgeting is a skill well worth developing. The exercise of medical practice budgeting will require a little extra discipline, but will ultimately result in more effective overall practice.
Here are seven medical practice budgeting tasks to follow to stay on track.
1. Know your medical practice expenses
The process of medical practice management will require a deep comprehension of your financial situation. One of the major problems facing many doctors is the fact that they don’t even know what their costs are, let alone what they should be. In order to remedy this, it is advisable to start tracking everything you spend money on. You’ll easily be able to find standards and best practices for tracking expenses in a medical practice that should cover which expenses to track, how to do it and bookkeeping protocols.
Also, national statistics on practice overhead are readily available and will provide a benchmark against which you can modify your budget and compare yourself to similar practices in your area.
2.Track all medical practice expenses appropriately
In order to make proper use of these standards and statistics though, you need to know which expenses are worth tracking. A mistake that many doctors make is simply to follow the limited categories present on their tax returns to dictate what warrants attention.
It is a much better idea to crafts a practice-specific list of expense categories that directly reflects your situation. This list should be as detailed as possible, making it easier for important information to be extracted easily by members of the practice and by an accountant for tax purposes.
3. Use existing data to make smart budgeting decisions
Now it is time to use the data you’ve accumulated to formulate your medical practice budgeting. This is most easily accomplished by obtaining national or regional family practice overhead statistics for each category in your chart of accounts and then adjusting those standards to suit your practice.
Although it is definitely useful to be able to compare yourself to the national average, remember that certain factors can have a huge impact on expenses so look closely at any discrepancies before panicking.
4. Craft your medical practice budgeting around specific targets
Using benchmark data available, evaluate your situation and set some goals relevant to your practice. This could include having certain targets in mind surrounding staffing counts, accounts-receivable levels and contractual disallowance percentages.
Once you’ve settled on which benchmark data is most useful to you, you can establish a baseline that will allow you to apply adjustments as needed to your medical practice budgeting.
5. Evaluate the medical practice on an annual basis
It’s important to update the benchmark data annually so that your baseline is always in tune with the current state of your practice. Doing this once a year will ensure that you’re not unnecessarily bogged down with short-term variations that occur because of holidays, physician absences, weather closures, season changes, epidemics and local economic issues.
Although these and other unpredictable factors should be noted as a reference tool, they shouldn’t be the basis for which you make any broader adjustments to your annual budget.
6. Regularly compare your practice’s actual finances with your budget
It might seem obvious reading it on the page, but a budget serves no purpose if you don’t periodically compare your practice’s actual finances with said budget. You’d be surprised how often this crucial step is overlooked and the impact that not making appropriate changes can have.
This type of evaluation is called a “variance analysis” and it provides a targeted way of seeing if there are any numbers in your actual practice finances that vary from the expected norm, how much they vary and for what reason.
7. Perform a regular variance analysis
In order to catch any problems as soon as they arise, it is advisable to conduct a quarterly variance analysis. Rather than doing one every month, which ends up being a waste of time and resources, quarterly reviews tend to smooth the monthly statistical variation and avoid false positive abnormalities.
On top of regular variance analyses, you should also be mindful of adjusting your budget any time your practice environment changes, such as in the event of a rent increase or workers’ compensation premium increase. The more scrupulous you are in keeping your books up to date, the less problems you will have come tax time and the less likely you are to end up in an unfavourable financial situation.