Activate the CEO of YOU™ – Build A Common Sense Budget
“We must consult our means rather than our wishes.” ― George Washington
Before you can make money you have to figure out how to spend it. This means creating a common sense budget based upon your means rather than our wishes.
Creating a budget is an important key to helping you turn your dreams for practice success into reality. Using this crucial tool, you can track cash on hand, practice expenses, and now much revenue you need to keep your practice growing.
By committing these numbers to paper, your chances of succeeding with your practice are helped by anticipating future needs, spending, profits and cash flow. It also let you spot problems before they spread out, so that you can switch gears and make proactive decisions.
What is a budget?
A budget is a financial document used to estimate and plan future income and expenses. Following the principles of a personal financial budget, you can create a budget for your practice. A budget may be prepared simply by using paper and pencil, or on a computer using a spreadsheet program like Excel, or with a financial application like Mint.com, Quicken or QuickBooks.
Your budget can give you information about how much you can spend each month and how much you can take out of your practice as a salary or draw to live on. If you set up your budget to require a profit, you will start with all the expenses you need to pay each month, leaving the required profit as the income number needed to make the budget balance.
For example, if your goal is to net $15,000 profit per month. Add up all your expenses and your income for the month, and then subtract expenses from income. If the difference is $15,000 then you have your required profit and the budget is balanced.
If the difference is less than $15,000, you will need to either decrease your expenses or increase your income until your reach that amount to make the budget balance. If you need help with creating a required profit budget, click HERE to contact me.
Why Your Practice Needs a Budget
The bottom line on why to create a budget for your practice is that it will help you figure out how much money you have, how much you need to spend, and how much you need to bring in to meet practice goals.
But there are other reasons, too. Bankers and investors may want to see a budget when you ask for a loan or other forms of funding. Employees should also be made aware of the budget so that they understand where the practice is going and become motivated to work harder.
Budgets can also help you minimize risk to your practice. A budget should be created before you sign a new lease or invest in new equipment. It’s better to find out that you can’t afford new equipment before you commit to spending a certain amount of money every month that you don’t have.
According to the U.S. Small Business Administration, a budget can be used to indicate some of the following:
• The funds needed for labor and/or materials.
• For a new business, total start-up costs.
• Your costs of operations.
• The revenues necessary to support the business.
• A realistic estimate of expected profits.
You can use this information to adjust your plans or expectations going forward. A 12-month budget can be updated with actual expenditures and revenues each month to help you know if you’re on target.
If you’re missing the targets set out in your budget, you can use the budget to troubleshoot by figuring out how you can reduce expenses like payroll or general office expenses, increase sales by more aggressive marketing, or lowering your profit expectations.
How Do I Create a “Common Sense” Budget?
The process for preparing a monthly budget for your practice includes the following steps:
- List all sources of monthly income, including Patient out of pocket and 3rd party payments. Since your practice doesn’t get paid immediately from a 3rd party, deduct a percentage of your expected income for those payments. You can determine those percentages from your bank statements.
- List all required, fixed expenses, like rent/mortgage, utilities, and phone. These are payments you must make every month, even if you have less income than expected. If your fixed expenses are too close to your expected income, you may have trouble making your payments. See if you can cut down on your fixed expenses or turn them into variable expenses.
- List other possible and variable expenses such as payroll and cost of goods. Payroll can be a variable expense if employees are paid by the hour. The # of hours worked may fluctuate month to month, therefore fluctuating your labor costs. Cost of goods is another example of a variable expense. This expense is usually tied directly to sales. For example, if you have fewer patients in one month, your lab bills may be lower.
- Next, include expenses to capture new patients in this budget, like advertising expenses. If you want to grow and/or maintain your practice, you must advertise. The amount allocated for advertisement may differ for new practices vs. established practices. Nevertheless, there must be an amount allocated.
- Finally, you will need to create columns for actual and budgeted income and expenses, so you can see how the budget works out in real time. It also helps if you find out what the budget norms are your practice modality in order to compare your practice performance with the norms. Don’t forget to review your budget at the end of every month to see if you’re on target and to project for the next month.
When you are estimating income and expenses, estimate income low and expenses high. In other words, be pessimistic about both income and expenses. Then when something happens (and it always does), you can be prepared.
Remember that budgeting is not an exact science. “A budget works on common sense,” says Victor Butcher, of Butcher Financial Services in Memphis, Tenn., a former president of the Tennessee Society of Certified Public Accountants’ Memphis Chapter who advises small businesses.
For example, if you made $300,000 last year in revenue, common sense indicates you won’t make a million in the upcoming year. You are best off estimating in the range of $310,000 to $330,000. But be prepared to make adjustments to your budget as the year progresses.
Recommended Resources from www.Inc.com:
Microsoft offers a series of free downloadable budget templates. These include a rolling budget for small business, an expense budget, a website budget tool, and an annual operating budget for a services business.
BetterBudgeting offers a free budgeting worksheet.
Docstoc is a marketplace that lets you find and share professional documents. The website has an assortment of free printable budget worksheets to try.
Winsmark Business Solutions has a free downloadable cash flow budget worksheet.
Business Owners Idea Café has an all-in-one first year business budget calculator that lets you plug in your startup, monthly, and personal expenses in your first year in business.
A few important questions
Do you have a “common sense” budget for your practice?
Are you reaching your financial target goals?
Are you able to use your budget to troubleshoot the reason for missed targets?
If you answered no to any or all of the questions above, we can help. Our CEO of YOU™ practice consulting is designed to help you create a success blueprint for your practice. One of the ways we do this is by helping you build a “common sense” budget.
To learn more about our consulting programs, click below to request more information.
Until, next time, remember to dream big, take risks and become the CEO of YOU™!