The pressure is on for the medical profession during this economic turmoil. Consolidation is occurring in many marketplaces, the threat of reimbursement reductions are on the horizon and costs of operating a medical practice continue to escalate for independent practices.
Often times medical practice leaders wonder such things as how they can protect themselves and what they and their families will do. The first thing that is often overlooked, but very critical to a physician’s professional and personal business plan, is an annual budget.
Financial budgets need to take a two-prong approach. The first is what is going to happen over the next 12 months based upon what changes you make, and second is how it will impact you over the next 36 months.
While it may seem overwhelming to establish a budget, for smaller practices it is not as difficult as one may think. The first item to think about is the revenue stream and what it will look like in the future. One factor is the past volume of patient care and what you expect it to be going forward. You should consider if government regulations will change reimbursements currently received and if there is any anticipated impact from the indemnity insurance carriers.
You should next review the major expenses of the practice. Some, but not all, expenses to include (with some questions to consider) are:
Do I need all the personnel I have? Are there any excessive compensation levels due to staff longevity with the practice?
How does my rental rate compare with other medical office space in the area? When is the lease coming up for renewal? Is it time to see if I can extend the lease and lock in a lower rental rate? Should I seriously consider “shopping” the rental market in my current area for good deals, especially newer office buildings/complexes? If yes, then use those comparisons to negotiate with your current building management.
When was the last time you reviewed other insurance company policy premium amounts? What are your limits? Could you modify to help reduce the insurance premium amount?
Should I join an independent physician association (IPA) or group purchasing organization to help drive down that cost?
Third, all non-major expenses should be listed and reviewed. After all the revenues and expenses are accounted for, subtract expenses from the revenues to come up with the net income of the practice. The result of this will be the amount of compensation one should expect to receive if the budgeted target amounts are met.
Total Revenue $850,000
Major Expenses (list) (225,000)
Non-Major expenses (list) (245,000)
Net Income (Owners Compensation) $380,000
Based on your figures you should be able to figure out if compensation is enough, and if not, then you should modify the budget either by increasing revenue or decreasing expense. You might also want to look into other revenue avenues to pursue (e.g. hospital affiliation, on-call pay).
Next it’s time to visit what you spend at the personal level with regards to out of pocket expenses. List the annual amounts of all your estimated fixed and variable personal expenses, some of which include, but are not limited to:
Meals and Entertainment Property taxes
Utilities Automobile Payments
Household Maintenance Insurance Premiums
Automobile Expenses Savings
Clothing/Household items Alimony/Child Support
Sum up the variable and fixed expenses per above. This amount represents the total personal expenses of your household.
Calculate the net available cash to your personal spending. This can be calculated as follows:
Owners Compensation (a) 380,000
Tax rate (Estimated Federal & State) 40%
Estimated Taxes (b) 152,000
Available cash (a) – (b) 228,000
If the net available cash as calculated above is less than the amount you calculated as your personal expenses, then you should fine tune your personal budget as you are operating in a deficit position.
Often individuals do not want to spend the time to go through the detail to calculate these business and personal budgets. However, medical practice leaders that do spend the time are in better position to withstand economic pressures.
Barry Fruchter, CPA is a member of Moore Stephens Tiller LLC in Atlanta, Georgia. Moore Stephens Tiller is a leading provider of accounting, tax and consulting services to the medical community. Barry specializes in services to physician practices and other selected healthcare entities. Additionally, he manages the firm’s entire health care sector. Barry can be contacted at email@example.com or 404-256-1606.
Moore Stephens Tiller LLC is also a proud member of the National CPA Health Care Advisors Association (HCAA). HCAA is a nationwide network of CPA firms devoted to serving the health care industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact HCAA at info@HCAA.com.