Think Business

In today’s challenging healthcare market, physicians, especially those who operate small practices, should maximize their financial resources in order to best treat their patients. And many do, by cutting expenses, buying supplies on the cheap, and reducing staff.

However, the experts say that true fiscal success does not occur without defining, setting - and following - a stringent budget. And according to Michael Fleishman, vice president and principal at Gates, Moore & Co. in Atlanta, that’s precisely what 99 percent of small practices don’t do.

“They can be very unsophisticated in terms of finance,” he says.

Chip Lewis, managing director at PSA Financial Center in Lutherville, Md., agrees that the majority of small practices do not adhere to fixed budgets and they tend to react to, rather than follow, market trends.

“Physicians tend to make decisions on an ‘as-needed’ basis because they come from a science background, not a business background,” Lewis says. “Unless they ... learn the importance of a budget, they don’t contemplate the negative effects” of not having one.

Lewis adds that to succeed and make a profit, physicians need “to think and act like businesspeople.”

Line by line

Fleishman says that the best way for a small practice to start a budget is to review the practice’s spending habits from the past two years.

“Go over the expenditures line item by line item, categorically on the ledger. If you find you spent $10,000 on rent the first year and $12,000 on rent the second year, look at what caused the increase and see if there is anything that can be done to keep it from increasing further,” he says.

Lewis agrees and suggests that physicians determine both their fixed costs, such as annual expenses like rent and payroll, and the variable expenses, such as supplies and seasonal needs (flu shots, for example) from the past year.

“Once it has been determined where the money is being spent on a yearly basis, it is then a good idea to break it down quarterly and then monthly,” Lewis says. “It is the best way to visualize what can be spent.”

Once you have identified the increases and decreases, Fleishman suggests comparing your findings to the national averages, to determine how your practice performs.

“This will show if the expenses are typical or if it is time to cut costs,” he says.

Although financial consultant Vince Gallo agrees measuring up to national statistics is a good idea, he believes that researching local medical trends is a more valuable effort.

“The socialization of medicine occurs in different locations,” he says. “Find out what affects the medical revenues in your area and project those findings into your own budget.”

Gallo adds that, when reviewing local trends, it is important to consider regional economic factors.

“If you have a seasonal practice, you can only count on a given portion of the year to bring in the largest cash flow,” he says. “You will have to figure out your yearly income on 1/12 increments.”

When optimism isn’t enough

Although it is helpful for small practices to predict a smooth income stream, experts suggest keeping several options available in case life throws you a financial curve ball. To avoid an economic disaster, Gallo suggests that small practices design three budget scenarios: “optimal,” “worst-case,” and “most-likely.” Then track the budget according to these circumstances every 90 days and make adjustments.

“Over time you will see which one is the most realistic [for your practice],” Gallo says. “That is the best way to avoid getting into a deficit position.”

Gallo adds that it is important to include every variable cost, from capital purchases to possible liabilities.

“I saw a very successful physician declare bankruptcy because he didn’t balance his revenues or project liabilities,” he says. “That is not only disconcerting, it is unnecessary.”

Once you have successfully identified your most efficient financial plan, Gallo suggests projecting a one-year and a five-year budget.

“A one-year test-run is a good way to ensure you have found a solid budget, but after that it is time to choose a long-term strategy,” Gallo says. “It will help the business enterprise and keep everyone focused on a common goal. When working in a small practice, everyone has to have the same practice vision.”

Avoid common mistakes

Monitoring expenses like office and medical supply costs may seem minor in comparison to the large capital expenditures, like staff salaries and equipment purchases, but the experts emphasize that the little things do count.

“When considering supply costs, [physicians] have to remember that every sheet of paper, every medical bandage is an expenditure to the practice,” Fleishman says. “There are so many options available now, especially with stores like Office Depot and Staples, it is almost impossible not to save money in this area. Physicians just need to take the time to shop around.”

Lewis says that another mistake that small practices make is spending a large amount of money on inventory.

“Small practices need to maintain the minimal amount of inventory that they need,” Lewis says. “Otherwise, they find that they have a surplus of unneeded or expired supplies. Too much inventory is lost money.”

Another potentially costly activity to monitor is marketing. Although active promotion is important to attract new business, experts caution small practices to be sure they are getting what they are paying for.

“Take, for example, the Yellow Pages. It is an expensive investment and can have positive results. But small practices need to track the amount of business, if any at all, that is coming directly through this endeavor,” Fleishman says.

He also suggests that small practices steer clear of outsourcing companies when trying to cut costs.

“You never know what you are going to get,” Fleishman says. “It is too risky to spend that kind of money [when trying to cut costs].”

Instead, he suggests, small practices should adequately train their administrators.

“Why pay extra money for what can be done internally?” he says. “Unfortunately, small practices sometimes fail to budget in the money that it will take to train a good office staff. As long as you are certain that your staff is strong and competent, they are a cost that should bear no limits.”

Other factors, such as increasing Medicare rates and the number of insurance carriers that a practice accepts, are two areas that small practices tend to overlook when figuring out their finances.

“Figure out how many Medicare patients the practice has seen and include that revenue into the budget,” Fleishman says. “It is also pertinent to accept a variety of insurance plans. Fee schedules can change on a dime, so it is best to keep your carriers spread out.”

Following a budget is more than simply watching expenses. Creating this financial framework gives small practices not only the ability to judge how they are progressing as a business but also to find opportunities for growth - such as whether there is a need to add or eliminate procedures, or if there is enough money to add new equipment and staff.

“Budgeting allows you to look at your practice as a whole,” Lewis says. “It is the key to analyzing and maintaining a successful practice.”

Rebecca E. Jones can be reached via editor@physicianspractice.com.

 This article originally appeared in the March/April 2001 issue of Physicians Practice.