Developing a Prospective Revenue/Expense Budget

The management of a busy medical practice is challenging.  With declining reimbursements physician owners are looking for strategies to boost revenues and to cut costs.   Effective practice management requires the evaluation of potential threats and opportunities confronting the practice.  Good financial information allows the physician-owner to act in a decisive and timely manner.    The ability to quickly assess, develop and apply proper information and analysis provides the avenue for greater success.  The ability to continually measure actual performance as compared to forecast helps take the guess work out of overall practice management.  The development of the Prospective Revenue Budget is the start of a successful practice management strategy.

 The year-to-year visibility of selected financial metrics offers a solid basis with which to plan future investments, projects, and new products or service initiatives.  The review of historical financial data should be your first activity when developing a prospective budget.  Key metrics to consider are:

• Net Collections per Encounter
• Total Annual Patient Encounters per Provider
• Average Patient Encounters per Day
• Number of Providers and Available Working Days

It is with these key metrics that the Prospective Revenue/Expense Budget is created. 

The Prospective Revenue/Expense Budget is a straight forward financial control tool.  It provides the physician-owner and practice manager visibility to revenue expense control opportunities.  Top line sales can grow through a number of avenues; adding a provider, adding new service lines, increasing patient encounters aggressive third-party payer contract management and managing practice expenses.  Controlling expenses becomes a more manageable task once you know where the money is going and how expenses compare to national benchmarks.

 Furthermore, the Prospective Revenue/Expense Budget provides the mechanism for physician owners and practice managers to collectively discuss the financial health of the practice, set and prioritize practice goals, and helps focus the practice management team on specific annual objectives, while simultaneously managing the expenses.

 Developing a Prospective Revenue/Expense Budget requires the collection and evaluation of the following components:

• Examination of historical financial and production data,
  
• Assessment of current and future productivity,
• Events that impact productivity, e.g., provider vacation, holidays, conventions or meetings,
• Current daily average of patient encounters per provider.

The Prospective Revenue/Expense Budget utilizes condensed expense categories.  By doing so, unnecessary detail is avoided, providing a “big picture” view for each category. Understanding the big picture and its relationship to benchmarks values is the starting point for proactive financial management.  Key benchmarks, represented as a percentage of net collected revenue, to examine include:  support staff payroll, support staff benefits burden, occupancy rent, furniture and equipment, administrative supplies and services, medical supplies, professional liability insurance, other insurance, professional fees, and advertising and promotion.

Next, it is common that each expense category be divided by twelve, thus apportioning an equal expense budget for each month.  This serves as a starting point from which the office manager can add or subtract from each category based on market influences, days the providers are absent or even based on the number of “selling” days for each month. 

By using the monthly apportionment, the practice can manage expenses in an interventional way.  For example, if the actual monthly payroll expense exceeds the budgeted amount, it may indicate increased overtime expense or unscheduled provider time off.  In these cases, the office manager could perhaps adjust staff scheduling to minimize the payroll spend.    

Expenditures are typically presented as percentage of net collected revenue (gross charges minus adjustments).  As such, it could be inferred that increased net collected revenue always results in increased expenses.  This is not necessary true.  It is also important not to make decisions based on a single metric.  Instead,  look at the whole picture to see how one performance metric influences another.   

Practices that proactively utilize the Prospective Revenue/Expense Budget gain enormous control over financial performance.  Aspects of positive practice behaviors or results can be congratulated and rewarded.  Likewise, deficiencies can be corrected.  Prospective financial management provides the confidence for the physician owners and office managers to anticipate revenues and expenses.