But using assumptions to plan your business is a simple and educational process. Let’s look at how to design a simple budget for 2023.
To start, you know that, based on your specific history, you’re currently collecting approximately $450 per comprehensive exam. Let’s assume that, given the pending economic downturn and a bit of economic turmoil, you feel you can hold that average for the coming year. You also can plan how many days you’re going to be available for patient care and how many comprehensive exams you’re going to attempt to schedule daily. Let’s assume, for the purposes of this exercise, that you’re currently planning to see patients 180 days in 2023 and you’re averaging 16 comprehensive exams per day and have an average of 18 such slots available. Thus, you’re running at an 88% exam to capacity ratio Armed with this data, a simple equation will provide guidance for your next year’s revenue. 180 days times 16 yields 2880 exams. 2880 exams times $450 yields revenue of $1,296,000. Now, for the purposes of planning, let’s assume that you set a goal for yourself to add one additional exam each day…17 exams vs. 16 to bring your coverage ratio up from 88% to 94%. You can do that because you’re adding a scribe who is going to make your exam process more efficient, and you’ve invested in some marketing tools. So, in terms of planning, based on these assumptions, you anticipate seeing an additional 180 patients in the coming year, resulting in a revenue increase of $81,000 for a grand total of $1,377,000. Easy math! You now have your revenue budget.
Now that you have your revenue projected, it’s time to look at costs. Without getting into a myriad of detail, you know that this year your cost of goods was 26% of revenue. Let’s set a goal of reducing that number to 25% in the coming year. You’ll accomplish this by reducing the number of frames you display by 100 units…because less is more. You’ll also work to reduce shipping costs by bulk ordering product for patients on Tuesdays and Fridays instead of daily, resulting in a potential 40% decline in shipping costs. So, now we can project our cost of goods at 25% of revenue or $344,250.
The next important number is staff costs. Your currently investing 5.1 staff hours per comprehensive exam. You feel that that’s adequate to maintain your service levels…and the resulting revenue. Together with benefits, your payroll cost averaged $22.28 per hour during the most recent quarter, and you feel you can hold your average payroll cost per hour to $23.00 for the coming year. Now you can project your labor cost by multiplying your budgeted 3060 comprehensive exams times 5.1 staff hours per exam times $23.00 or $359,000, resulting in a labor cost percentage of 26%.
Now, using this same methodology, you can estimate each other line item of your P&L. Within an hour, you’ll arrive at a budget for the coming year. Easy peasy!
But remember that a budget is nothing more than a plan. And a plan is nothing more than guidance…a benchmark against which to measure your performance.
Our 34th president, Dwight Eisenhower, was Supreme Commander of the Allied Forces in Europe during World War II. One would guess that such a position requires a thorough education in planning. Indeed, developing and executing such actions as the D-Day invasion of Normandy was not likely something that was conjured up over a cup of coffee. Such an event took many months and many tens of thousands of man-hours to plan. Of the event, Eisenhower said, “Planning is critical, Plans are worthless.”
Why? Because we are all bombarded with change. Each day, something comes up that has either a positive or negative impact on our plan. But without a budget…which is nothing more than guidance, one can’t measure the impact of these changes. Supplier raises costs, a long-term staff member departs and is replace by someone will less experience, you added a new service that improved your revenue per exam. Each action or reaction has an impact. But, without a plan, you won’t know the impact.
Cleinman Partner practices have access to our simple budgeting tool that provides their annual plan. If you’d like a copy of this tool for your own use, simple reach out to us and we’ll be happy to supply one.