The heaven and hell of a practice budget

They're wonderful things to have — psyching yourself up to do one is another matter. Do you know where your money is tonight?

By David Elkins

Beginning in mid March, Dr J W D, a St. Boniface, MB internist begins to have a vague sense of unease about money. Income tax time is rolling around and she has no idea how much she made the year before — or how badly she might be in hawk to the government. Oh, she has a rough idea how she did, she drew a little more than she did in the previous year, she thinks. There was still some money in the practice account after she ponied up to MD Management for her RRSP at the end of February. She's made regular tax payments, so she's probably OK. Then lying in bed one night she breaks into a light sweat remembering 1992, and the $20,000 she had to borrow from her father when she came up short on her 1991 tax return. She might have saved herself that anxiety — if she'd had a practice budget.

Budgeting is a subject that's not bandied about much in medical circles. There are a few reasons other than the obvious one — every doctor is bored to tears by even the idea of it. Doctors are artists, not bean counters. Specialists who are paid by institutions — hospitals and medical schools being the most common — and who are provided with a warm place to sit as part of the package, don't need to fuss too much about their practice budgets; everything tends to come down to personal expenses. Even such things as cars are portioned between personal and business use, in most cases by their accountant.

NO HELP, NO MORE
At one time management companies were popular with physicians. The business structure they required put a little more emphasis on revenue and expenses, and even produced a corporate-looking set of financial statements every year to send to Ottawa with the tax return. The principle reason for these companies, however, was to allow physicians to write off the GST. When the feds outlawed the deduction the number of medical management companies dropped precipitously.

That leaves solo practitioners and group practices that operate as general partnerships. Both can benefit enormously from going through the exercise of doing an annual budget. They include spotting overheads that are too high; poor purchasing of supplies; under or over staffing, particularly if you use part-timers; compensation inequalities in group practices; missing items that could be written off and aren't, with the result that taxes are higher than they should be; avoiding cash crunches; catching embezzlement; and, the classic, why there isn't more money left for you.

Budgets aren't difficult to do, and they can even be fun in that they give you a chance to really understand how your practice works on the financial side, and often show how you can keep a little more of the revenue you bring in for yourself.

Companies traditionally use one of two types of budgeting: either a budget based on the previous year's spending; or so called zero budgeting, in which you start from scratch and estimate what each item should be in a real, if somewhat idealized, world. This is a useful exercise if you've been using the previous year's figures for some time and want to take a fresh look at your enterprise.

OH, DEAR EXCEL
If you've never done the exercise — and you're in a great company if you haven't — you'll probably use a combination of both methods. The easiest way by far to do a budget is to use a computer spreadsheet. Microsoft's Excel is the most widely used though all programs work more or less the same way. The principle advantage is that spreadsheets add up figures both vertically and horizontally, thereby balancing them automatically. If you've never used one, relax, an hour with a good manual and you'll be running figures like a pro.
The first thing to do is list all the items you want to include in the budget. Begin with revenue and then do the expenses.

Revenue: This is the easy one. List income from all sources, such as practice payments from the health plan, teaching, consulting fees, focus groups, payments from patients for extra services and so on. No need to be coy, these figures are for your eyes only and you want numbers that reflect reality as closely as possible.

Expenses: Break them down as finely as you can. Don't bunch categories together the way your accountant does when filing your return. You want be able to look down the list and tell at a glance where the money goes. Here's a partial list of what you might include.

Office expenses: rent, electricity, telephone, internet provider, cell phone(s) (given the way these charges can get out of hand, plan a separate category for this one), forms and stationary, postage, copier, receptionist/clerical, staff salaries (don't forget to make provision for deductions at source, charges which usually add about 10%), equipment, computer expenses and so on. Make as many categories as there are expense items you want to follow.

First decide on an annual figure and then break it down by the month — the spreadsheet program will do this automatically using copy and paste. It's not necessary to nail every figure, averages are fine.

Clinical expenses: Include medical charges here: medical supplies, laundry services, disposables, nursing help, medical equipment.

Personal deductible expenses: Professional fees, malpractice insurance premiums, disability, practice car expenses, meeting registration and travel expenses, meals and entertainment where applicable.

General overhead: Provide a single catchall expense category to take care of such things as sidewalk clearing in winter, parking, landscaping and general upkeep. One way to do this is to simply charge a percentage of revenue based on past history.

Profit/Loss: Total both the revenue and expense figures. Deduct the expenses from revenue — the spreadsheet can easily break it down month-by-month — and that's the take home figure. Solo practitioners get to take it all, groupers divide it among themselves according to whatever formula you use.

THE HARD PART
Once you've set down the basic budget you can play "what if" games to your heart's content. What if you added staff and another examination room. What if you stopped seeing patients altogether on Wednesday. What if you opened a walk in clinic on Saturday mornings. Plug in the figures and your budget answers these imponderables in cold hard cash.

There's another essential step. Once you have a handle on your costs, practice consultants strongly urge you to look at the percentages you're spending on various items and to compare them to benchmarks established for similar practices. For example, if you're spending 30% of your pretax revenue on rent, it makes sense to know whether it's in the ballpark for your kind of practice. The same goes for staff and other significant expenses.

One more thing, to get the full benefit from your budget, open it up every so often during the year and compare it to actual figures. Make adjustments as required. It's this part of the exercise that will give you peace of mind and stop the tossing and turning the Manitoba IM goes through around this time of year.