Compiling an accurate and useful budget (Proceedings)

A financial budget should accomplish three things:

1. It should help you plan for the future. How can the owners or managers of a veterinary practice properly plan for the future without an idea of where the practice is headed financially? How can the owners or managers of a veterinary practice make major decisions – buying a large piece of equipment, hiring a new associate, for example – without an idea of whether the practice can or will be able to afford it?

2. It should help you get a better handle on your revenue and expenses. Nothing helps a practice owner understand where his or her money is coming from and going then a financial budget. Sitting down and producing a budget will force the owner to understand the finances of the practice. This is always a good thing.

3. It should be a motivating tool for the owners and staff. The budget not only helps the owner chart where his or her practice is headed, but helps motivate the staff to get the practice there. Setting revenue and expenses goals is a key reason to prepare a budget.

A few ground-rules/misconceptions about budgets:

• The budget isn't a static document. A budget can be changed or adjusted depending on changing facts or situations. Nothing makes a budget more useless than when changing practice dynamics make the numbers in the budget unattainable. The loss of an associate, a major downturn in the economy – any major shifts should be reflected in an amended budget.

• A budget should be detailed...but not too detailed. No one wants to see a budget that lists every nickel and dime expense. Don't make it too cumbersome.

• A budget should be formatted in a similar way to your profit and loss...assuming your profit and loss is formatted properly. Keeping your expenses grouped by major categories – staff costs, costs of professional services, occupancy, administrative – will make the budget more meaningful.

• A budget can begin whenever you want. You don't have to wait until the beginning of your fiscal year. A budget can begin now and carry forward for the next twelve months.

• A budget should be broken down by month.

• A budget should take into account the ebbs and flows of a business throughout the year. Revenue and expenses in January will not be the same as they are in June. A budget should reflect that.

What you need to begin the budgeting process:

• Decide what computer software to use. Some people like Excel. Others like to prepare their budget in Quickbooks.

• Have the last twelve months of profit and loss statements handy.

• Have a calendar nearby. Plot out when your vacations are going to be or when you're taking your continuing education.

• Have an idea of what your practice's goals for growth are for the coming year.

The most difficult and time consuming part of preparing an accurate budget is the projection of revenue. How do you gauge how many clients will walk in the door? How to predict what procedures they will accept or reject?

Revenue budgeting can be as elaborate or as simple as you would like. Some practices like to project one number: total deposits for the month. Others like to project out different revenue sources, broken down by days open, clients seen, procedures performed, etc.

The most accurate approach is the more detailed approach. Monitor prior year numbers to project out where you think things will go.

The other more difficult area relates to staff costs. Usually the largest of the expense categories, staff costs can be unwieldy to anticipate, but usually if there are costs overruns in a practice, this is the area they are in.

Staff costs budgeting should be detailed by employee. A separate schedule broken down by doctors, back office, front office, and management should be prepared.

Include in staff costs section all payroll related costs: payroll taxes, workers comp insurance, benefits, continuing education, dues, all other employee related costs.

Animal care costs should be a percentage of gross, based entirely on historical averages. If you are trying to lower these percentages or alter your spending in the future, then the budget is where you should attempt to do this. The new percentages, however, should be realistic goals.

Occupancy costs should be fairly simple to project, as most of these expenses are fixed or quasi-fixed costs (rent, utilities, telephone, maintenance, property taxes, etc.)

Likewise, administrative costs are generally pretty fixed and should be pretty easy to project.

Other areas that should be considered in your budget:

• Equipment needs. What kind of money will you need for capital expenditures?

• Financing needs. Will you need to borrow to help your cash flow at any point?

• Distribution needs. What kind of owner draws or distributions will be required?

Finally, once you are happy with your budget and feel it is reasonably attainable, remember to compare the budget on a monthly basis to actual numbers.

Analyze all discrepancies and determine why the numbers are different.