Financial Pt 2 Flashcards
What is Budgeting?
Budgeting - is a process of planning expense and revenue and measuring these values gains the actual financial results, which will provide management with indications of how the operational plans are being executed.
The formula to calculate percent of gross revenue is:
Expense/ Gross Revenue x 100
Example: Medical expense is $87, 365.00
Revenue for the year is $1,250,000.00
$87, 365.00 / $1,250,000.00 = 0.069
0.069 x 100 = 6.98 So the percent of gross revenue would be 7%
For a budget plan to be carried out efficiently, it is advisable to allow as many team members as possible to participate in the budgeting process within reason. Bringing team members in the loop also helps avoid the negative feelings potentially associated with conversations about budgeting goals and job performance.
What information is needed to begin a budget?
*Last 3 years Profit and Loss and Productivity Statement
*All lease and loan documents
*Fee Schedule
*List of operational changes expected in the next few years and their potential effect on revenue and/ or expenses
*List of major capital expenses expected in the next few years.
*Employer roster and recent years W-2’s
The economic cycle (AKA business cycle) - which is predictable long term pattern changes in national income. The economic cycle has an impact on consumer confidence, the labor market, and inflammation, and therefore an impact on the ability for the practice to produce revenue.
Traditional business cycles undergo four stages:
1)Expansion - revenue growth.
2) Prosperity
3) Contraction - consumers cutting back on spending.
4) Recession
*Technology can often increase or decrease the demand for veterinary services.
*Interest rates and access to credit - can affect the ability for a practice to expand or invest.
What are the six steps of budgeting —
1)Determining the desired financial results
2) Analysis of the financial statements
3) Normalizing the revenue expenses
4) Budgeting revenue
5) Budgeting expenses
6) Combining budgeting revenue and expenses and making adjustments.
First step in budgeting - Determine the desired financial goal.
Typically measured by profit (revenue minus expenses)
Can also specify earning percentage to gross revenue that measures the amount of profit that can be made from each dollar of revenue received (divide profit by revenue)
Steps for creating a budget:
1)Determining the desired financial results
2) Analysis of the financial statements
3) Normalizing the revenue expenses
4) Budgeting revenue
5) Budgeting expenses
6) Combining budgeting revenue and expenses and making adjustments.
Goals for an established practice - revenue income statements from the last 3 years to predict a realistic goal (assuming no dramatic operational changes have occurred).
Goals for a start-up practice - recommend to use the 25th percentile of industry benchmarks.
Revise and refine goals as circumstances change.
*Be prepared to refine and revise goals as needed due to changes in market or practice.
Step 2 of budgeting - Analysis of the financial statement.
An affective budget requires a thorough understanding of the practices financial resources.
Revenue - measure historical trends by breaking down revenue by profit centers.
Expenses - to simplify the budget process expenses can be reorganized into four categories:
1) Personnel expenses (keep in mind the owners compensation may or may not show up under the personnel expenses on the financial statement)
2) Variable Expenses / Cost of Goods Sold
3) Occupancy / facility Expenses (Rent, maintenance, taxes, utilities)
4) Fixed / Administrative Expenses ( Equipment leasing, Dues, Advertising, Licensing and Interests)
Steps for creating a budget:
1)Determining the desired financial results
2) Analysis of the financial statements
3) Normalizing the revenue expenses
4) Budgeting revenue
5) Budgeting expenses
6) Combining budgeting revenue and expenses and making adjustments.
Step 3 of budgeting - Normalizing the Revenue and Expenses
Since budgets are typically created using the most recent years financial statements that may include non reoccurring items that wont actually carry into the future, it is recommended that you either remove any one time non reoccurring items from the financials use to create the budget or use an average of the last 3 years to help normalize those non reoccurring expenses prior to using the data to create the budget.
*Remove any one-time, non-recurring items from the financials used to create the budget.
Or……
*Use an average of the last three years to help normalize those nonrecurring expenses prior to using the data to create the budget.
Steps for creating a budget:
1)Determining the desired financial results
2) Analysis of the financial statements
3) Normalizing the revenue expenses
4) Budgeting revenue
5) Budgeting expenses
6) Combining budgeting revenue and expenses and making adjustments.
Step 4 of Budgeting - Budgeting revenue.
Steps for creating a budget:
1)Determining the desired financial results
2) Analysis of the financial statements
3) Normalizing the revenue expenses
4) Budgeting revenue
5) Budgeting expenses
6) Combining budgeting revenue and expenses and making adjustments.
Projecting the revenue the practice will generate in the following year. Some considerations include:
Patient volume - A key driver of revenue growth. Some factors that influence patient volume include:
*Addition or discontinuation of service.
* Addition or loss of DVM
*Overall economic conditions and consumer spending trends .
*Advertising and promotion projects
*Fee increase
* Demographics associated with the area such as population age, gender, and household income.
*Determine constraints on the capacity of the practice by reviewing the scheduling pattern.
*Average time of a DVM appointment
*Average time of a DVM procedure.
*Average number of each that fit into an 8-10 hour workday.
*Consider a 5 day work week and 48 work weeks a year and you have a projection for practice potential and capacity.
Step 4 of Budgeting - Budgeting revenue.
Fee Schedule -
Being the higher priced practice can increase client loss.
When introducing a new service for revenue generation, without historical data from the practice you may need to conduct market research to determine a reasonable amount of revenue that can be expected. It is recommended to be conservative with this figure.
*Projecting revenue on a per cost center basis allows for more accurate projection.
Step 5 of Budgeting - Budgeting expenses
Begin by normalizing figures.
A simple method of creating an expense budget is to add the last three years average growth rate to the base expense figure.
This method only works if:
*The practice is established
*Expenses were stable over the last 3 years.
*The practice will continue to operate similarly in the following year.
Steps for creating a budget:
1)Determining the desired financial results
2) Analysis of the financial statements
3) Normalizing the revenue expenses
4) Budgeting revenue
5) Budgeting expenses
6) Combining budgeting revenue and expenses and making adjustments.
Step 5 of Budgeting - Budgeting Expenses Continued..
For practices that do not meet the requirements on the previous slide; expenses will need to be projected and added to the base year figures. Expense budgeting procedures for the four distinct expense categories:
Personnel wages - calculate wage expense by applying an estimated raise percentage to the previous years futures. Consider any potential staffing adjustments in the coming year. Add benefit package expense by applying the historical average added to the salary expense.
Occupancy/ Facility Expense - per the leasing/mortgage documents. Taxes and utilities can be projected by applying the average increase in Consumer Price Index to the previous year.
Variable Expense/ Cost of Goods sold - calculate using the historical percentage of revenue.
Fixed / Administrative Expense - Typically grows consistently with the average growth percentage from that last 3 years.
Step 6 of Budgeting - Combining Budgeting Expenses, Revenue, and Making Adjustments
Once the revenue and expense process is completed; subtract the budgeted expenses from projected revenue to derive an estimate for future profits.
Adjustments to increase profit:
1) Increase revenue - via increased working hours, adding services, improve collections.
Also realize the added expense involved in these options.
2)Lowering Expenses - via cutting back on the discretionary spending and choosing less expensive supplies.
3) Lowering targeted profits - the initial desired results may have been unrealistic, and it may be necessary to lower the profit target to a more attainable level.
Final budget considerations -
Use the completed budget as a guideline for daily operational and financial activities, at the practice, departmental, and individual levels.
Periodically compare each units actual performance against budgeted goals. If there is a large variance, a thorough analysis is in order and the an action plan to resolve the issue.
Some reasons for a large variance include:
*Non- compliance with the budget.
*Waste
*Unrealistic budget to begin with
Expansion, prosperity, contraction, and recession are the four stages of:
A) The budget process
B) The business cycle
C) Exit strategy awareness
D) Business valuation timing.
B) The Business Cycle
What are two ways of normalizing revenue and expenses when creating a budget (Multiple choice)?
A) Remove any non-recurring items from previous year.
B) Combine the last three years as an average.
C) Combine annual budget totals and divide by 12 to normalize anticipated monthly expenses.
A) Remove any non-recurring items from previous year.
B) Combine the last three years as an average.
Which metrics below are important considerations when creating a budget (Multiple choice)?
A) Last three years Profit and Loss and Productivity Statements
B) All lease and loan documents
C) Fee Schedule
D) List of operational changes expected in the next few years and their potential effect on revenue and/ or expenses (new service expansion, etc.)
E) List of major capital
F) All of the above
F.) All of the above.
Client Credit Policies -
Extending credit to clients is not recommended, especially with many 3rd party options available.
Some reasons to consider extending credit to clients include…
*For clients with long, dependable payment histories with the practice who experience an emergency.
*Extending credit may increase compliance for high dollar treatments or surgeries.
If a the practice decides to not extend credit to a client regardless of circumstances, clients should made aware of this prior to performing services via signage or other written communication.
Creating a Credit Policy continued:
Begins with two “Sub - policies”, the client credit policy and the charge account policy.
Client Credit Policy - Established the pre qualifications necessary to open a charge account.
Charge account policy - establishes credit limits, payment due dates, payment methods and invoicing procedures.
