Financial management and budgeting: Part 4 (Proceedings)

Budgets should an integral part of your overall financial plan. With budgets in place you are more likely to control the financial destiny of the practice. The question always is; are you controlling your financial affairs or is the practice controlling you? While preparing a budget may not fully answer the question, it can certainly play a part in determining its financial success. It is the tool that quantifies the practice's goals and serves as a yardstick for measuring its degree of success. It will also relieve your sense of frustration resulting from a lack of direction.

What else can a budget be used for? Well not only can it be used for predicting income; it can be used to assist in controlling expenses. It can be used in such a way, that once completed, the information can be given to department heads or others who are put in control of practice areas such as payroll, inventory control, and administrative supplies to assist in controlling their areas of responsibility. If you hold them accountable, it is also very important that you provide feedback of actual expenses to budget so that they can see and measure how they are doing.

How do you get started preparing your budget? Set the budget utilizing a spreadsheet program like excel where it is easy to set totals and other calculations by formula. Budgets are meant to be flexible and subject to change so when you do so you want to make it easy on yourself for all other results to change as well. "What if" situations can easily be handled in this way. An alternative to the excel spreadsheet would be the utilization of QuickBooks®. See the May, 2004 issue of Veterinary Economics for setting up a budget in QuickBooks®. QuickBooks® have easy to use budget preparation tools that allow you to format your information the same way the QuickBooks® chart of accounts is set up. Setting up your budget tool in the same format as you report historical is important so you can make easy comparisons to actual data.

Where do the numbers come from? The past is always a great predictor of the future and finding past financial results and having them in front of you is important.

The starting place for your budget is income. The easiest way to project it is to do so by utilizing your veterinary software to determine your past year's monthly income. Enter these amounts onto the spreadsheet. Note the number of invoices generated each month and the average invoice. Then project this year's variable by looking at each component and determining how it will increase. When projecting invoices, consider any new programs or marketing you be doing that will increase the number of invoices. For instance, you may be planning a big dental promotion next February so you should take this into consideration when projecting how many invoices will be generated in the month of February. At the same time look at changes in the average invoice and take into consideration new marketing of services to existing clients or maybe changes in vaccine protocols. Also, don't forget to also consider any changes in the pricing structure that may take place. Once the revenue budget is complete, also prepare a budget for each doctor based upon the same methodology. Income budgets as a component of the entire process should be shared with staff and doctors. Once the process is complete also remember to benchmark the actual results with the budget and share that information. This way, doctors and staff will have an ability to measure their performance in terms of what was anticipated. Significant variance between the budget and actual should be explained.

Once the income is complete, it's time to move to expenses. Expenses should be looked at in terms of those that are variable and those that are fixed. Fixed should be put into the budget as set dollar amounts in the month the expense is actually incurred. For instance, if the rent is $6,000 per month, then this amount is put into the budget every month for the same amount. Insurance may be a fixed amount but only paid in January, April, and July. If this is the case, then the amounts anticipated to be paid should be input only in those months. The following is a list of fixed expenses which should be input into the budget based upon a fixed dollar amount:

Employee Benefit Programs..............Business Meetings

Professional Dues and Subscriptions..............Printing expense

Laundry and Uniforms..............Computer supplies

Continuing Education..............Office supplies

Rent on premises..............Postage expense

Rent on business equipment..............Accounting fees

Maintenance and service contracts..............Legal fees

Housekeeping and janitorial supplies..............Payroll processing fees

Repairs and maintenance..............Charitable contributions

Real estate taxes..............Business consultation services

Personal property taxes..............Bank charges

Insurance..............Miscellaneous

Utilities..............Depreciation expense

Telephone..............Amortization expense

Advertising and promotion..............Interest expense

Business gifts and flowers

Expenses that are not fixed by dollars are considered variable and in theory move in direct proportion to fluctuations in income. These expenses should be budgeted as a percentage of gross income. The following is a list of variable expenses that should be budgeted based upon a percentage of gross income:

Drugs and medical supplies.

Lab costs.

Radiology costs.

Dietary products.

Surgery costs.

Dentistry costs.

Anesthesia costs.

Animal disposal.

Salaries and wages.

Payroll taxes

The variable expense percentages that are used should be based upon the historical past or based upon an anticipated target. For instance, a look at the previous year financial statements indicate that that drug and supply costs for 2005 were 18% of gross revenue but the industry target is 16%. You can base the cost at the 18% or 16% depending upon the target you are looking to achieve.

The following are industry benchmarks may wish to consider for both income and expenses when preparing your budget:

Once the budgets are complete, review them to make sure they accomplish your financial goals and objectives. Also, if you prepared them with a spreadsheet program, transfer the data into your accounting program so you can print monthly actual to budget reports. This will allow you to measure your performance and stay on track with your goals.

Working with Budgets in Quickbooks®

Your QuickBooks® budget should follow your chart of accounts. The more detail in your chart, the more detail the budget. Your QuickBooks software provides an easy interface for entering and editing your budget. It is similar to a spreadsheet with columns for each month across the top of the screen. Here's how to get started:

• Go to the Company menu, choose Planning & Budgeting, and then click Set UpBudgets.

• Click Create New Budget

• Choose the year for the new budget, and choose Profit and Loss (income and expense)

• On the Additional Profit and Loss Budget Criteria screen select No additional

• criteria. If utilizing the class feature of QuickBooks select Class.

• On the Choose how you want to create a budget screen you can select Create budgetfrom scratch or Create budget from previous year's actual data. Click Finish to create the new budget.

• Your Set Up Budgets screen appears and is available for editing.

• Amounts can be changed individually by entering the new amount in the monthly column of the account.

• Selecting the Copy Across button copies the currently selected amount to all monthly amounts to the right of the selected cell.

• Select the Adjust Row Amounts if you want to adjust the amounts by either a set dollar amount or a percentage. To adjust row amounts:

o Select a cell in the budget

o From the drop-down list, choose

1

st

month

or

Currently selected month

o Specify whether to increase or decrease that amount for the remaining months by a fixed dollar amount or a percentage.

o If

Currently selected month

was chosen, you can also select Enable compounding. This will compound the number entered in the Increase or Decrease field across the selected months

• Enter or modify the budget amounts and click Save

• To verify the amounts and changes made a Budget Overview report should be printed by going to the Reports menu, choose Budgets and Forecasts, and then Budget Overview. This report summarizes your budgets for income and expenses (profit and loss) for each account.

• Additional budget reports are Profit & loss budget performance report and Budget vs. actual report. These can be printed by going to the Reports menu, choose Budgets and Forecasts, and then the appropriate report.

• The Profit & loss budget performance report summarizes your actual income and expenses compared to what you've budgeted for the current month and year. To see a list of the transactions that make up an amount, double-click the amount.

• The Budget vs. actual report compares your budgeted amount to your actual income and expense. The $ Over Budget column shows the difference in dollars between your budgeted amount and the actual amount. A negative amount means that you were under budget for the month; a positive amount means that you were over budget. The % of Budget column shows the actual amount as a percentage of the budgeted amount. Less than 100% means that you were under budget for the month; more than 100% means that you were over budget.

The practice manager and owner should review the budget reports on a monthly basis. This provides an addition tool to monitor financial success.