Shoestring Budgets
Finding a balance restraining and constraining
By Tracy Dowdy, CVPM
Budgets are a foreign concept in many small general practices. However, if you want to take your practice from good to great, you need to know the heartbeat of your practice. What profit centers generate the most income in your practice? What areas in your practice are the least profitable? How do you benchmark your practice’s financial condition to other practices throughout the country? You need to be asking and answering these questions in a systematic way to forecast and proactively plan for your practice’s future financial success.
Taking a financial pulse
Your practice has key performance indicators (KPI) you should evaluate regularly. These KPI’s are like the practice’s pulse rate and blood pressure: they are tangible signals that help you make important decisions regarding fees, workflow efficiency and the services you offer your clients. AAHA Financial & Productivity Pulsepoints third edition (AAHA Press, 2004), surveys various profit centers in practices throughout the country. These statistics can help you identify best-practice targets for each profit center’s income as a percentage of your total income; and for expenses in each profit center as a percentage of total income. For example, laboratory income as a percentage of total income averages approximately 14%, while laboratory expense as a percentage of total income averages approximately 3%.
Nine easy pieces
Most practices dread monitoring this data. But the process can be simple and the value great. First, remember that budgets and goals aren’t monsters — rather, they help you reach the practice’s goal of financial health. Next, tackle common problems using the solutions outlined below.
- Accept the learning curve. Living with a budget is an education. Trimming expenses, knowing what to allocate for each line item or how much cash reserve to keep . . . these skills take time to hone. Learn to adjust a budget as you go, and what was once a shot in the dark gradually will become a more predictable, useful tool.
- Be prepared to miss your budget estimates. Rule No. 1 in setting up a budget is that projections are best guesses and nothing more. You're going to miss your estimates occasionally. If the practice is achieving 100% of its targets, you’re not being aggressive enough in setting goals. It’s okay to miss targets so long as you act quickly and intelligently to correct matters.
For example, if you budgeted $500 a month for imaging supplies and your bill consistently tops $650 for three months running, adjust your imaging-supplies allocation to $550. By the same token, if the bill is only running an average of $400, trim your supply expense. Then reallocate among profit centers for these adjustments to ensure you achieve your overall practice goal.
- Work flexibly. Being willing to stay flexible is the key to staying on budget. For instance, if your actual revenue doesn’t match forecasts, trim your expenses to compensate for the lost profits. By the same token, if you're earning more than anticipated, it might be time to invest in better equipment, labor or additional inventory.
- Watch your cash flow. You’ve heard the phrase “cash is king.” Cash-flow problems are what kill most small businesses. Monitor your income closely to make sure you have the funds to pay your bills. Keep checking that your revenues equal or outweigh expenses each month.
- Be conservative. When you first set up your budget, it's a good idea to overstate your expenses and lowball your expected revenue. In addition, use this approach to make sure your cash flow holds up.
- Nurture a cash cushion. The uncertainty of budgeting — both in terms of income as well as expenses — is one of the biggest threats to the survival and success of any veterinary practice. While trimming expenses to the bare minimum is always a good idea, it's also prudent to set aside income whenever possible. If you can afford it, earmark a portion of every month’s excess income and sock those funds away in a money market account. These funds may come in handy for predictable expenses such as year-end taxes, but they will be absolute lifesavers if unexpected expenses crop up suddenly.
- Check your budget every month. This is a point that I can’t stress enough. Go over your budget every month and examine your cash flow so available funds are sufficient to meet your liabilities. If you follow point No. 2 and adjust your budget as you go, you'll have an emergency fund to take care of monthly overruns. Use it when things cost more than you thought, and put money into the contingency fund if net revenues exceed expectations.
- Use your budget as a form of restraint, not constraint. Setting up and sticking to a solid budget is the most effective teacher of fiscal discipline there is. But don't be shy about busting your budget on occasion if it’s truly warranted. It's often impossible to budget for a valuable last-minute seminar or a trip to a trade show to make valuable contacts. If you are too rigid with your budget, you'll refuse to spend when you have the opportunity to make a valuable investment in your practice.
- Identify the low-hanging fruit. By setting income and expense goals for each profit center, the entire team can be involved in improving client compliance. Set or raise medical standards for your practice, then train your entire health care team to educate clients on the importance of why the services are essential to the overall health of their pets.
Tracy Dowdy is a speaker and practice management consultant with the Management Resource Group in Texas. You can reach her at tdowdy@mrgconsult.com or 817-966-9369.
© AAHA Trends Magazine September/October 2005 Issue
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