The Benefits of Healthcare Practice Budgeting

Budgeting basically means ensuring you have more revenue coming in than you are spending. It’s that simple, right?

You probably already know that’s not true, especially if you’re part of a busy healthcare practice. You have to account for fixed costs — facility rent, equipment leases and management salaries — as well as variable ones. The latter consists of things such as staffing levels, clinical wages and medical and office supplies. Revenue - such as patients and procedures - also should be a budgeted item.

Unlike fixed costs, though, variable costs depend on your patient volume. Therefore, you must base those expenses on your estimated patient volume for the upcoming budget period. That’s not an easy feat, especially as numerous practices continue to try to achieve financial recovery after the COVID-19 pandemic.

Many provider organizations continue to face falling reimbursements and rising costs. Add in staffing shortages, supply chain disruptions and higher interest rates, and detailed and comprehensive budgeting has never been more important.

Understanding Trends and Challenges

Being able to appropriately plan for the future of your practice and continue to provide quality care to your patient population isn’t impossible. However, it does require detailed planning and a clear strategy and goals. It involves identifying trends — and adjusting to them in a timely manner.

For example, the continuing healthcare staffing shortage is making a big dent in many practice’s labor expenses. Many practices have raised salaries or minimum wage for their employees, with 61 percent of medical groups planning 3-5 percent merit/cost-of-living increases for support staff in 2023.

Achievable Advantages

As with most any business process, there are challenges in healthcare budgeting, from changes to reimbursement and payment models to unpredictable economic events (e.g. COVID-19 pandemic). When these challenges are addressed, though, and practices conduct appropriate budgeting, there are a slew of advantages to be had. In general, practices are better able to:

  • Provide more effective and efficient patient care
  • Use past budgeting data to plan for future operations
  • Align operational plans with financial goals
  • Make real-time adjustments
  • Reduce purchasing errors
  • Effectively manage cash flow and capital expenditure
  • Increase staff cooperation and collaboration
  • Emphasize capital investments that align with strategic objectives
  • Efficiently allocate resources
  • Communicate long-term goals
  • Ensure availability of funds for unexpected expenses
  • Control overall spending
  • Build fund for future projects

Common Types of Budgets

Now that you’re aware of the benefits of budgeting, the next step is understanding the methods used and which one(s) work best for your practice. Remember that the type of budget you select often depends on the size of your practice and its unique goals and needs.

Capital Budgets

Utilized to allocate funding for physical resources, capital budgeting consists of allocating funds to buy durable goods, including equipment, updated EHR software and computer technology, or facility maintenance or improvements. It focuses on cash flow instead of profits and enables you to improve your facility’s overall performance. Although capital budgeting is different from operational budgeting, each type influences the other, and both are important for reaching the practice’s goals and objectives.

Operational Budgets

Typically the largest monetary output for healthcare practices, operational budgeting designates funds for operating and personnel costs and other fixed and variable expenses. Often the biggest expense is for staffing, including training, overtime and benefits. Operational budgets may even be as specific as allocating for items such as cotton swabs, sterile gloves and other day-to-day expenses required to run the practice. For technology, this type of budget covers things like practice management software or cloud data storage. Note that the U.S. national average for healthcare IT expenditures is $32,500 per full-time provider.

Rolling Forecasts

This approach to budgeting enables healthcare practices to predict future performance over a continuous period of time (i.e., monthly, quarterly) through the use of historical data. It’s especially advantageous for dealing with unexpected events or crises because it allows management to quickly adjust and adapt with them. The biggest benefit is financial flexibility, which lets funds be distributed to where they’re most needed.

The Perks of Budgeting Properly

If you fail to budget, what could possibly go wrong? As someone who is part of a healthcare practice, you probably already know the answer to that. Budgeting isn’t simply jotting down numbers and hoping for the best.

One report of healthcare executives found that four out of five respondents said costs tied to poor budgeting and planning are passed onto their patients. In addition to dissatisfied patients — and practice staff — a lack of budgeting can result in reduced patient volume, inadequate or excess supplies and purchasing, higher taxes and more. It negates the ability to properly and proactively adjust finances and operations as needed, all of which is necessary for a viable practice.

There are a few important things to keep in mind when conducting the budgeting for your practice, the principal one being participation from your administrators, leaders, and key stakeholders. Creating a budget is futile without the input of those vital to the success of your practice.

As with planning, set SMART goals — ones that are specific, measurable, achievable, realistic and timely. Keep your focus on improving patient care while reducing costs.

It’s a good idea to set budget benchmarks for your practice to compare to industry standards. These numbers are often helpful in helping you modify your budget, and you can adjust them to best suit your practice.

Routinely review your actual budget data and compare it to your projected numbers. Ideally, you want to do this monthly, at least quarterly, and act on any variations accordingly, a process known as variance analysis.

Let patient volume lead the way. If you expect your practice to see more patients in a specific month or quarter, budget based on that number. It’s essential that you know how many patient visits and procedures are necessary to meet the revenue goals of your practice — especially if the practice has seasonality.

Also consider any services you might want to add for patients (i.e., telehealth or remote patient monitoring) and how they will affect your budget, from staffing to supplies. Such services might offer a higher return on investment (ROI) but require an initial investment.

At SpringParker, we offer collaborative approaches customized to the needs of each client. We’ll help you evaluate your strategic and business initiatives, including guiding you through developing your planning and budget process(s), as well as assist you with streamlining your benchmark reporting for increased performance.  We know that success in healthcare begins with developing, implementing and executing plans, strategies, and processes that make sense — now and in the future. Contact us to learn more!