Managing Your Practice

You Need a Budget


For many years, I chaired the office efficiency course at the American Academy of Dermatology’s annual meeting. Each year, I asked how many participants compiled a yearly budget for their practices. In an audience of 400, the largest affirmative response I ever received was three, and some years there were no raised hands at all.

Why do physicians so vigorously resist an exercise that is so basic to every other business and profession on the planet? Typically, I hear one of two reasons: It’s tedious, or my colleagues seem to be doing just fine without one.

But the days of "doing just fine" are coming to an end. As competition for patients increases, expenses continue their upward spiral, and the government continues its steady encroachment on private practice, physicians who plan ahead will have an advantage.

Budgeting need not be tedious; determine what you need to do yourself and what can be delegated. And now, as the year winds down, is an excellent opportunity to map out your finances.

The first step – the basic gathering of numbers that everyone seems to dread – can be delegated. Ask your accountant to compile the practice’s gross income over the last 12 months, in monthly increments.

Break it down by type of service: office visits, hospital visits, surgery, lab fees, and so on, listing both the amounts billed and collected. This is not only for calculations of collection ratios, but to determine your "seasonality" – which I’ll discuss in greater detail next month. Do the same for expenses, and again break them down by category: salaries, rent/mortgage, business and medical supplies, and so on.

In many cases, the mere collection of this raw data will save money. You might discover, for example, that expenditures for business supplies are unexpectedly high. Perhaps a competing vendor can do better, or perhaps you have an overuse or theft problem.

Once the numbers are accumulated, start extrapolating them into next year. If your income rose by, say, 6% this year, can you expect a similar rise next year? Why or why not? To get a fix on a realistic goal, go through each component of your gross income and decide where the increase could come from. Can you raise prices for office visits or cosmetic procedures, renegotiate at least one third-party contract, or add another exam room in order to see more patients?

Perhaps there is an impending change in your area that you can factor in, such as a competitor who is retiring. If that physician is known for a specific service, and it’s not a service you offer, could you start?

You are, I hope, beginning to see that this exercise is well worth the effort. After you have mapped out income, turn to expenses. Perhaps some of the assumptions that you’ve made on income will affect expenses; for example, adding a new procedure may require the purchase of new equipment. If you have a higher census goal, you may need an additional assistant.

If you’re considering adding an associate, you can determine if he or she will bring in enough revenue to cover salary and expenses by completing two versions of next year’s projected budget – one with the associate and one without.

Once you have prepared your budget, follow it. Your accountant or manager can generate monthly spreadsheets comparing actual financials with projections, and the year-to-date, compared with previous years. There are many parameters to explore.

Look for deviations from predictions and possible reasons for them, such as factors you didn’t (or couldn’t) anticipate. Make a note of them; it will help you with next year’s projections.

A budget can be justified in two major ways: You’ll better understand where your practice is going, and the forces at work to change it. And you’ll become aware of unexpected events while there is still time to influence them, rather than making such discoveries well after the fact – or worse, never finding out at all.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J.

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