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Key Metrics Inherent to Any Good Practice Budget

by Vince DiDomizio

Key Metrics Inherent to Any Good Practice Budget

The key to a good practice budget is getting accurate forecast targets so you and your practice can set goals and, hopefully, surpass those goals.

Budgeting Revenue

Let’s take a look at the 4 steps/variables to take into consideration when budgeting Revenue.

Variable #1: Revenue per Encounter

This is simply the total encounter revenue divided by the total number of office encounters.

  • Formula: Revenue from Encounters / Office Encounters
  • Example: $600,000 annual revenue / 4,000 encounters = $150.00 revenue per encounter

Using revenue per encounter, will allow you to: estimate future revenue, monitor operational efficiency, and diagnose your revenue cycle. There are many factors that could influence this important metric and allow you to spot potential hurdles in your practice. Some factors being:

  • Do you have an effective scheduling system? 
  • Are walk-ins or virtual consultations allowed?
  • Are claims being processed and paid timely?
  • Is the payor mix excellent, fair, or poor?
  • Do you have an excellent coding team who are following proper coding guidelines?
  • Is the accounts receivable being managed and are proactive strategies in place? 

Variable #2: Encounters per Day

This is the number of total encounters divided by the number of provider days. Some practices may have a part-time physician, others a full-time one, and the encounters per day depend on how many total days that individual may work.

  • Formula: Total Encounters / Provider Days
  • Example: 4,000 encounters  / 200 days worked = 20 encounters per day

Pro tip: There are 261 working business days in the 2021 calendar year. You can use this free tool to confirm how many business days or non-working days there are between two dates, including or excluding weekends or public holidays.

Variable #3: Days Worked per Year by Provider

For this variable, you’ll count the number of days per week and the number of weeks per year each provider will work. Drilling down to the actual days/weeks worked each month can help you gain insight; some practices may have a doctor who only works 48 weeks out of a 52-week year while others may have a physician who works 51 but only 2 days per week. Being able to get a handle on when you really expect to see patients and encounters can be invaluable.

  • 1st Formula: What is the number of days per week the provider is going to work?
  • 2nd Formula: What is the number of weeks per year that same provider is going to work?

Do this for every provider that will generate revenue for the practice to gain a better estimate of revenue as not all providers may have the same schedule.

Variable #4:  Seasonality or Known Variables

Budgeting in advance for known variables (such as parental leave) will give you the clarity and confidence of knowing ahead of time that you’ll be able to meet your goals. And planning ahead for typical seasonal fluctuations such as back-to-school time can give you a buffer when you need it. Looking for seasonal trends can help you budget more accurately.

Example of Budgeting Revenue

To forecast the revenue for your entire practice, you would need to use all 4 variables above, for each one of your providers (any staff member that sees patients: Pediatricians, nurse practitioners, physician assistant, etc.) with their estimated revenue per provider, based on their individual encounters and days/weeks worked. This is because individuals may work different hours or weeks as mentioned in variable #3. It could be done by practice if everyone works similar in nature or if it’s only a 1-2 doc practice for simplicity.

How do you get 16 encounters per day on average? There are a total of 261 working days in the 2021 calendar year. Provider #1 says 4,182 encounters in one year so 4,182 / 261 = about 16

Using Benchmark Data

Benchmark data, used in addition to the variables listed above, is one of the most valuable resources at your disposal. Using your current practice management system, run a report showing the frequency of each office visit billed over the past 12 months. Then run a report showing the revenue amounts by payor over the past 12 months. 

Pro tip: Get 24 months of data if it’s available; this will help you tighten up your budget and your revenue number as much as possible. With the COVID pandemic, 2020 might not be the most accurate baseline whereas 2018 or 2019 might give a more accurate picture of your practice.

Budgeting Expenses

One of the most common mistakes I see in a practice budget is the misclassification of expenses. 

Fixed Expenses

  • Salary
  • Rent
  • Business Insurance
  • Telephone
  • Janitorial/Cleaning
  • Dues & Subscriptions
  • EMR Software

Variable Expenses

  • 401k, P/R Taxes & Bonuses
  • Benefits
  • Advertising/Marketing
  • EE/ER Insurance
  • Utilities
  • Professional Fees
  • Medical Supplies/Vaccines
  • Training & Other Misc. Supplies

Some expenses are not 100% fixed or 100% variable. Sometimes you have to take into account the amount of time or the number of encounters you are expecting in your budget.

Using Benchmark Data

As with revenue, expenses are an area where benchmark data can be invaluable. Look at your expenses for the past 12 or 24 months — if necessary, pull out invoices — and separate them according to whether they’re fixed or variable. 

For fixed expenses, you can assume the same cost; if you want to account for overall inflation, merit increases, or known changes in insurance or vendors, you can add a slight percentage to cover it.

Variable expenses are trickier, and this is where most of your budgeting time will probably be spent. Use your benchmark data to determine when in the year each of these expenses is highest and budget accordingly. For example, you may need to hold off on a vendor payment, or on purchasing medical supplies or vaccines if your inventory is sufficient. At times you may need to take into account the amount of time/number of encounters you’re expecting in order to offset your expenses.

Example of Budgeting Expenses

Below is an example of typical expenses:

Where mistakes most often happen is when people mistake variable expenses for fixed expenses simply because they occur on a monthly or other regular basis, and by the end of Q1 they’re way over in expense planning and trying to play catch-up. So just be mindful of your expenses and use past information to categorize them.

Key Takeaways

Don’t Just Set It and Forget It

So you’ve made a budget — now what? Comparing your actual revenue and expenses each month to your budget is what really matters. You can see where you did well and where your shortfalls were. Discovering the shortfalls early allows you to make decisions to “right the ship”. 

Pro Tip: Take the time to compare your actual revenue and expenses to your budget at least once a month. It will save you a lot of time and heartache in the long run.

Templates & Resources

  • Your accountant can be an excellent resource for helping you budget 
  • Quickbooks has both budgeting and forecasting capability: Quickbooks Instructions 
  • Microsoft Excel has some basic budget templates that you may find useful: Office Templates

Pro Tip: Search for business budgets within excel or online and use the layout as the foundation. Then customize based on your revenue streams, number of providers, and expenses. This saves you time and provides a more professional look.

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