5 steps to creating a budget

December 1, 2016

Applying the Golden Metric when creating a budget and increasing your profits

The views expressed here belong to the author. They do not necessarily represent the views of Optometry Times or UBM Medica.

“That which is measured improves. That which is measured and reported improves exponentially,” said Karl Pearson, an English mathematician and biostatistician.

It seems article after article talks about measuring everything we do in our offices.

We measure and track a lot of performance metrics: capture rate, boxes of contact lenses, revenue per staff hour, revenue per doctor hour, number and percentage of new and existing patient appointments, and so on.

Today let’s talk about the Golden Metric-profitability. This metric is what I affectionately call MIB (Money in the Bank).

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Although I am a proponent of measuring and tracking office performance with other measures, they are all focused on top-line improvement or money inflow. This is great, but an increase inflow does not necessarily translate to more MIB.

To increase profitability, you need to create a budget.

Creating a budget will keep you on track with your overall practice strategy and keep you from getting “spend creep” that reduces your profitability. It will also allow you to make decisions based on facts of your practice performance rather than emotion. I have used the “It is not in my budget this year” line more than once with vendors.

For some, doing a budget and planning is very natural; for others, it seems like a daunting task.

Here are 5 steps for creating a budget and increasing your profits in 2017.

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Step 1: Set the baseline-review last year

While there are different ways to create a budget, the most logical way is to look at the past year.

If budgeting is new for you, look at the past few years to understand your trends and habits. Work with your accountant to evaluate how and where you spend your money and how you track money coming in and out of the practice.

Many years ago while working with a practice consultant, I adopted a “manage expenses as a percentage of revenue” philosophy. Today in my consulting, I can usually take a quick look at a practice profit and loss (P&L) Statement to see where the opportunities are for improvement and increased profits.

Once you see your current profit, decide what kind of profit you wish to make in 2017. Set the percentage and work backward against all the other expenses.

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Here is an example table of categories and targets to get you started:

Categories and targets

1. Cost of goods sold             (COGS) 22-30 percent                                

2. Staff salary and benefits  (SSB)  18-24 percent

3. Marketing                          (MAR) 2-5 percent

4. Occupancy costs                (OCC) 7-11 percent

5. General office overhead    (GOO)            2-7 percent

6. Equipment                         (EQ)    3-5 percent

7. Profit (doctor benefit)      (NET)  25-35 percent

Note: These are a broad guideline and can be adjusted depending on your practice business strategy, location and services. Ultimately, we start with a bottom line net of 30 percent and work backward controlling other expenses.

 

Step 2: Involve your staff in planning

Empowering and trusting your staff with helping not only will help grow the top line but also improve the bottom line. Engaging your staff allows you to mentor them and helps them grow along with the practice.

In addition to the performance metrics, we discuss and openly share financial performance with the staff every month. This leads to an open discussion on how well we are doing in some areas and what we could improve upon in others.

I know many of you will immediately resist the idea of sharing financial information with your staff. We used to feel the same way, but we realize that sharing this information has given our staff a totally different view on the practice.

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They now feel vested and realize how much goes into running a practice and an office. Once we shared the numbers with our staff, they had some great ideas on how to save money and be more efficient-which ultimately leads to a better bottom line.

If you are not ready to let them see the full budget, start small with one area. The area that they can contribute the most and the quickest will be the general office overhead-or what we call GOO.

This is what we call the “sticky note” money. If you give your staff input in this area you will be amazed at the ideas they have and how much they can save you just by being involved and aware. The first year we gave budget responsibility to our staff, we saved 2 percent in GOO expenses.

Just think, in a million-dollar practice that is $20,000.

 

Step 3: Set realistic goals, but stretch them

Put the budget on paper by starting with two numbers: How much revenue are you going to collect, and how much do you want to make.

Budgeting is more than simply controlling expenses. Budgeting is also thinking about your practice and looking for opportunities to grow top-line revenue. This is where those other metrics can play an important role.

Look at the past year, analyze your market and practice, then set realistic goals for practice growth. Make this number realistic but also not a slam dunk.

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Setting these top-line income goals will allow you and your staff to focus on doing the best you can each day to hit those monthly goals. Once you have a top-line goal, determine how much you want to net out of the practice in 2017.

Depending on your current practice size and how you are positioned, a 25 to 30 percent net profit is a realistic goal.

I have worked with offices that are as low as 10 percent and as high as 40 percent plus.

I have found that the biggest difference is those that set a business strategy and have a budget always are more profitable than those that do not.

 

Step 4: Be like Nike-just do it

The hardest step is the first one.

For many, starting this process is frustrating. Practices often realize where they can make some changes and quickly improve the bottom line. I get the most excited for those practices because I know I am going to help them make a difference.

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Step 5: Monitor profit and adjust

A major portion of Karl Pearson’s quote is often forgotten. To see the full effects of measuring you also must report and monitor. This accountability is critical.

The key to setting financial goals and a functional budget is to make sure:

• The numbers are measurable and realistic

• The method is consistent

• You report the numbers and are held accountable to someone

• You adjust and overcome obstacles to meet the goals

We believe that the constant measuring of our numbers-as well as awesome staff and doctors-contributed to our continued practice growth.

All other metrics are important, but ultimately managing expenses will lead to an increased bottom line. Approach the budget not how you are going to cut spending, but instead employ a mindset of how much you are going to make in the next year.

Now is the time to build your budget, get your staff involved, and have a great 2017.

Please let me know how you fare in your budget planning or if you have any questions. I can be reached at chspear@gmail.com

Check out other blogs from Dr. Spear and others here