How to use a budget to boost practice performance

For many small practices, creating a budget is an annual exercise that culminates in a binder that sits on the shelf and collects dust for the remainder of the year. But experts say practices that don't develop and regularly review a budget are missing out on a tool that can provide warning signs of financial trouble and fraud, and help to make large purchases less disruptive to cash flow.

“If you think of a practice as a living body, the budget is like a vaccine,” says Rick Gundling, CMA, senior vice president for healthcare financial practices for the Healthcare Financial Management Association. “Having one doesn’t mean your practice’s health won’t go off track, but the risks are minimized. And when you check in on a periodic basis, that’s like your financial stethoscope.”

A solid, regularly reviewed budget sparks conversations between the physician and staff about potential trouble spots within the practice. “It keeps you informed instead of surprised and lets you take action before something becomes a problem,” Gundling says.

Janet Burns, business manager for University Family Medicine Center, a two-physician primary care practice in Orlando, says the need for budgeting and watching overhead is not always obvious to physicians, because they don’t understand the value they can get from it. “By looking at monthly numbers, I am able to find things that are happening that I otherwise would not be aware of,” she says.

Creating a better budget

An effective budget does not have to be complicated, but should be designed to match the management style of the physician, or else it won’t be effective experts say. 

Doctors who prefer high-level overviews with minimal details of the business should work from budgets with those same traits. Doctors who are detail-oriented may be interested in a budget with more line items that show expenses in greater detail, says Cindy Nyberg, CPA, CMPE, chief financial officer and strategic planning consultant for Fulcrum Strategies, a physician consulting firm in Raleigh, North Carolina. For example, medical supplies could be one broad category, or broken down into specific subcategories for greater detail.

Melissa Lucarelli, MD, a primary care physician in Randolph, Wisconsin, tried a detailed annual budgeting process but didn’t see any return on the time and cost involved in creating it. “For a small practice like mine, I don’t have the luxury of saying, ‘We’ll go into the red this month and make it up next month.’”

What works for her practice is a simpler accounting review of monthly expenses compared to what the practice has spent in the past. “We are just looking at how much do we have, how much are we getting in and how much do we need to pay each month,” says Lucarelli, a member of the Medical Economics Editorial Advisory Board. “To me, it feels more agile and less stressful.”

Don’t worry about capturing every last financial detail

“I always caution physicians to keep it as simple as possible,” says Nick Fabrizio, Ph.D., FACMPE, principal at the Medical Group Management Association. “Come up with a simple process you can use that monitors revenue and expenses. It’s OK to forget things when you start. It’s better to do that than to create an elaborate budget with 50 line items that is too difficult to understand and becomes this big, scary thing that no one wants to touch.” Detail may be great, but keep in mind that more detail also requires more staff time to track, he adds.

Lucarelli’s strategy for budgeting illustrates the best approach-find what works, experts say. “There’s not one model you must use,” says Nyberg. “The budget has to serve the business.” 

The first step in creating a budget is to look at revenue and payer mix, Nyberg says. This will not only establish a starting point, but offer insight into creating growth. “You can’t just say you’re going to increase revenue 10% next year,” she says. “If you are 50% Medicare, revenue is pretty much flat.”

Once revenue is established in the budget, Nyberg suggests organizing and dividing expenses into categories like supporting staff compensation and benefits, occupancy expense, furniture and equipment expense, medical expenses, miscellaneous expense, midlevel-provider expense and physicians expense. These broad categories make a budget much easier to understand, and if variances occur, information can be gathered at that time to provide more detail to give the physician a better idea of what is driving the change.

“If you aren’t making financial decisions off every office and medical supply purchase, then put them together,” says Gundling. “If you need to go deeper, then do it.”

Communicate to the staff which expenses go in each category, because they may not always be obvious, Nyberg says. Some staff members may be involved in the budget-creation process, but who is included is largely a level of job function and physician comfort with sharing financial details.

“Getting input is great, but it depends on how much the owners want to share with the staff,” says Nyberg. “Eventually though, someone will be held responsible for trying to move the needle on budget goals and they should have some input into the creation process.”

Using a budget to improve a practice

Once the budget is created, it must be reviewed at least monthly to be useful, experts say.

Gundling says physicians should look for trends-compare the numbers to the prior month and to the same month from the year prior. If a particular category is much higher or lower than it was previously, start asking questions.

“Once you understand the variance, then you can start formulating what to do,” says Gundling. “The budget causes you to ask the ‘what’ and the ‘why’ questions. It gives you more impetus to dig deep.”

If, for example, supplies are costing more than in the past, maybe a contract or supplier review is in order. If nothing can be done about the increase, then maybe money needs to be taken elsewhere from the budget to make up the difference and protect cash flow, says Gundling. “Work with your staff to be very attuned to those variances to try to understand whether it’s a one-time thing or an ongoing problem,” he adds.

Fabrizio recommends looking at actual dollar amounts and not just percentage increases or decreases when reviewing. “Two percent in one category may be $100 while in others it might be $1,000,” he says. “If that extra $1,000 expense goes on for 10 months, you might have paid out $10,000 before you realize it.” 

Burns says that the budget in her practice acts as a guide on where to focus cost-cutting efforts. It can also be used to forecast returns on larger investments.

For example, Nyberg worked with a practice that was sending patients out for MRIs. The physicians thought getting their own MRI machine would be a good investment so as to keep the money in house, but a budget analysis showed that with 53% of their payer mix in Medicare and with the correspondingly small reimbursements, the machine would never pay for itself.

When a budget is done correctly and regularly reviewed, it can offer many beneficial insights into the financial health-present and future-of a practice. 

“It’s one of those necessary things, but I think physicians look at budgeting like they look at having a tooth pulled,” Gundling says. “But budgeting really does help in having an ongoing conversation about the practice and minimizes surprises and maximizes cash flow. A budget allows you to stay on top of your practice.”