Session 9 Finances Part 2 Flashcards
Budgeting
A process of planning expense and revenue and measuring these values against the actual financial results which will provide management with indications of how the operational plans are being executed.
Gross revenue equation
Expense ÷ gross revenue × 100
How many people should be involved in budgeting?
A good amount of staff
How to carry out a budget
Allow as many team members as possible to participate in the process.
Benefit of including many team members in budgeting process
Helps avoid negative feelings potentially associated with conversations about budget gaps and job performance
What you need to begin a budget
Last 3 years P&L and Productivity statements
All lease and loan docs
Fee schedule
Lost if operational changes expected in the next few years and their potential effect on revenue/expenses
List of major capital investments expected in next few years
Employee roster and recent years W-2s
Economic cycle is AKA
Business cycle
What is the economic cycle?
Predictable long term pattern changes in national income.
What does the economic cycle have an impact on?
Consumer confidence
Labor market
Inflation
Therefore practice revenue
Traditional business cycles undergo 4 stages
- Expansion
- Prosperity
- Contraction
- Recession
Phases of the business cycle involve ____ on a global out look
Changing employment rates, industrial productivity and interest rates
Technology in the business cycle
Can often increase the demand for vet services
Interest rates and access to credit
Can affect the ability for a practice to expand or invest
Expansion
Revenue should increase
Contacting
Revenue should decrease
Outside influences on the budget process
Four stages of the business cycle
Technology
Interest rates and access to credit
The six steps of budgeting
- Determined desired financial result
- Analyze financial statements
- Normalize revenue and expenses
- Budget revenue
- Budget expenses
- Combine budgeted revenue and expenses and make adjustments
Budgets are
Informed guessing
Determining the desired financial results is
Specifying the goal that the practice wants to achieve
Specify the goal of the practice is measured by? And can specify?
Typically measured by profit (revenue - expenses)
Can specify earning percentage to gross revenue that measures the amount of profit that can be made from each dollar of revenue received (profit ÷ revenue)
Goals for an established practice. Goals are based on ____
If you know how you did the last 3 years you can know how you are going to trend this year
Goals for a start-up practice
Recommended to use the 25th percentile of industry benchmarks.
To Determine the desired financial result
Specify desired goal
Revise and refine as circumstances change
Be prepared to keep refining prn due to changes in market or practice
When Analyzing the financial statement you should ….
Break revenue down by profit centers
Simply expenses into 4 categories
4 categories of expenses for analysis
- Personnel
- Variable / COGS
- Occupancy/ Facility
- Fixed/Administrative
Normalizing the revenue and expenses means
Remove any one time non-recurring items
OR
Use an average of the last 3 years to help normalize the nonrecurring expenses prior to using the data in budgeting
Why normalize?
Budgets are typically created using the most recent years financial statement which can include big nonrecurring changes (i.e. new equipment)
Budgeting revenue is
Projecting the revenue the practice will generate in the following year
Budgeting revenue is tied to
Budgeting expenses.
If you want to have more revenue from vaccines and sell more vaccines you will also need to buy more and budget for that.
Revenue budgeting is harder than
Expense budgeting
Why is revenue budgeting thought of as harder than expense budgeting
All the factors you have to consider
A key driver to revenue growth is
Practice volume
Influences of practice volume
- Addition/removal of services
- loss of DVM
- economic conditions
- advertising and promotions
- fee increases
- demographics associated with area
What determines the constraints on the volume capacity of a practice?
Average DVM appts time
Average DVM procedure time
Average number of each that fit into 8-10hr day
When determining practice capacity and potential projections you need to consider
5 day work week with 48 weeks per year
Example calculations for revenue goal
15 min appts
1hr procedure
2 procedures a day and 24 appts a day
5 day work week 48 work weeks a year
48(wks) × 5 (d/wk) × 24 (appt/d) =5,760 appts per year
5,760 × average transaction fee = good place to start for revenue budget
Parts of revenue budgeting
Patient volume
Fee schedule
Fee schedules consider high v low and how to introduce new service
Higher prices means potentially less clients
Be conservative when introducing a new service for revenue growth without historical data - market research is done in real time to determine the amount of expected revenue.
To get more accurate revenue projections you need to
Project revenue on a per cost center basis
Budgeting expenses begins with
Normalizing figures
Simplest method of creating an expense report is to
Add the last 3 years average growth rate to the base expense figure
The simple method of creating an expense report 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
If practices meet the simple budgeting expense criteria then
Expenses will need to be projected and added to the base year figures.
4 distinct expense categories
Personnel wages
Occupancy/facility
Variable expenses/ COGS
Fixed / Administrative
Personnel wages are calculated by
Applying an estimated raise percentage to the previous year’s figures considering any potential staffing adjustments to the coming year
Add benefits package expense by applying the historical average added to the salary expense
Occupancy/Facility expenses is calculated by
Leasing/mortgage docs.
Taxes and utilities are projected by applying the average increase in the Consumer Price Index to the previous year
Variable/COGS cost is calculated by using
Using historical percentage of revenue
Fixed/Administrative expenses
Typically grow consistently with the average growth percentage from the last 3 years
Consumer Price Index
A list/index of prices used to measure the change in the cost of the basic goods and services
AKA cost of living index
Combining budgeted revenue, expenses and making adjustments is done by
Subtracting the budgeted expenses from projected revenue to derive an estimate for future profits
Adjustments to increase profit
- Increase revenue
- Lower expenses
- Lower targeted profits
How to increase revenue
Increase working hours
Add services
Improve collections
(Realize added expenses in the above options too)
Lowering targeted profits means
The initial desired result may have been unrealistic and it may be necessary to lower the profit target to a more attainable level
Before making adjustments
Compare projected profits with profit goals from step 1 (choosing a goal)
If the projections are lower you can look at making the adjustments
The completed budget should be a guideline for
Daily operational and financial activities from a global perspective, as well departmentally and individually
Once you have a budget how often do you need to compare actual performance against it?
Periodically to look for variance and once found create plans to resolve.
Reasons for a large variance in budgets
Non compliance
Waste
Unrealistic to begin with
Expansion, prosperity, contraction and recession are the four stages of
The business cycle
What are two ways of normalizing revenue and expenses when creating a budget?
Remove any nonrecurring items
Combine the last 3 years as an average
Which metrics are important considerations when creating a budget?
Last 3 years P&L and Productivity Statements
Fee schedule
List of operational changes expected in the next few years and their potential impact
All lease and loan docs
List of major capital
Most industry experts agree extending credit is
Bad
Extending credit is AKA
A payment plan
When do you consider extending credit to a client?
Clients with long dependable payment histories that may have just gone through an emergency or significant acute balance for tx
When trying to increase compliance for high dollar tx or sx
If no extended credit policy is allowed how should clients be made aware?
Prior to performing SX/tx via signage and written communication
2 sub-policies for credit policies
Client credit policy
Charge account policy
Client credit policy
Established the pre-qualification needed to open a charge account (payment plan)
Ex. Established 2 years of perfect credit with the practice and not an asshole
Charge account policy
Establishes credit limits, payment due dates and invoicing procedures
6 details needed in the charge account policy
- Pre-qualification procedures for clients of unknown standing
- Process for flagging pre-qualified client accounts
- Total invoice amount a pre qualified client can charge (not pay at check-out) without approval of management
- % of the bill that must be paid at check out
- Procedure for managing aging accounts and collecting overdue monies (AR)
- Use of Charge Account Forms
Charge Account form AKA
Payment plan form
8 details needed on charge account forms
- Client info (name, address, employer, phone #s)
- Amount of unpaid balance
- Credit service fee
- Total amount financed
- Terms of credit (days payment is due, any penalties for late/missed)
- Interest rate and timing
- Amount credited, agreed upon monthly payment, last payment due date
- Client signature in agreement
Important factors of credit policies
Train staff to be confident and well versed in the credit policy
Post written guidelines regarding payment
Communicate a brief summary of payment options when scheduling a new client
2 simple pre-qualification procedures to consider
- Call the clients listed phone numbers to make sure they are in service and not disconnected
- Call the employer to verify employment and length of employment
3 key credit enforcement policies
- Make sure staff completely understands and adheres to it
- Don’t override properly made staff decisions
- Don’t make exceptions
What are the 2 sub policies of a credit policy
Client credit policy
Charge Account policy
A list of procedure to use when considering ways of extending credit to clients includes creating ranges of available credit amounts based on the client’s longevity with the practice. T/F
Flase
How often should you review the fee schedule
Minimally once a year
CPI
Consumer Price Index
Consumer Price Index (CPI)
Practice should be aware and increase prices annually to reflect the cost of living
One of the first steps in fee setting and analysis
Determining how much a service costs the practice
Calculating cost of a service equation
((Fixed costs per min + staff costs per min) × (length of procedure in min)) + ((DVM costs per min) × (length of procedure in DVM min)) + (direct costs × 2) + profit = cost of service
Fixed costs per minute
Determined from income statement
Admin, facility, DVM (on salary), and number of billable minutes the hospital is open.
Example of fixed costs per minute calculation
Staff costs per minute
Non DVM staff costs ÷ billable minutes × # of non DVM staff needed × minutes of the procedure
Monthly staff costs ÷ minutes per mo = A
A × amount of staff needed for the procedure = B (total staff costs per minute)
Staff costs per doctor
Same calculation as staff costs
Direct costs equation
Cost of supplies used to preform tx × 2 (to cover hidden inventory fees)
Profit in equation
Determined by management as a desired percentage
Considerations for fee schedules
Competitive markups for “shopped” services (OVH, NTR, VXNs)
Location
Staff training
client services
Competition
The consumer Price Index can be instrumental in determining the cost of living increase for a variety of expenses associated with running a practice T/F
True
Elements included in the fee analysis calculation
Staff costs per minute
Veterinary cost per minute
Fixed cost per minute
Employee Embezzlement
More than 5% of gross revenue is lost to embezzlement in small businesses annually.
67.8% of practices have been victims of fraud or embezzlement
Embezzlement clues
Sudden unexplained or extravagant purchases
Constant convo about money probs
Receives calls from creditors
Complains about bookkeeping errors made by others
Declines to take vacations or share responsibility
Known gambling tendencies
Under significant life stress
What is the amount of loss needed before prosecuting for known and proven embezzlement ?
No monetary loss is too small
What entity is a good resources
for the practice in the event of embezzlement?
Insurance carrier
Chart of Accounts
A list of created numbered categories used to define each class of items for which money is spent or received.
Backbone of any accounting system
Chart of Accounts
Importance and benefits of chart of Accounts
Promoted consistency and accuracy, allowing data to be compared from year to year with the industry as a whole
Easily created in most accounting software programs
Imprest petty cash
A cash fund maintained for small practices
Factors of imprest petty cash
A fixed amount is reserved and replenished prn
All receipts are counted and reconciled to amount left in the fund
Receipts are coded for the proper expense account and the fund is replenished
Improves internal controls by providing a system for tracking cash purchases instead of using the reception cash drawer
