This article was originally published in a sponsored newsletter.
I've observed a striking pattern during visits to independently owned offices. Most haven’t embraced the practice of creating budgets and forecasts for planning and decision-making (in this article, I’ll use both terms interchangeably). This oversight is akin to navigating a ship without a compass. If this is your practice, use this article to get back on track.
Creating Your First Draft Budget
If the idea of making a budget or forecast seems as daunting as choosing the perfect frame for a picky client, don't fret. Properly executed, it's a tool to sharpen focus, set achievable goals and enhance success in the coming year. Most people who engage in forecasting also typically get assistance from financial professionals or industry partners to enjoy higher-than-average net profits. The first step in forecasting is to analyze your current financial position using the previous year’s results. Utilize your accounting software to understand actual revenues and categorize expenses. The key is to balance granularity with manageability in expense categories. See how your profit and loss (P&L) statement compares to these categories:
- Cost of goods sold: Frames, lenses, contact lenses, other (e.g., disposables, nutraceuticals)
- Salaries: Office staff, associate doctor
- Overheads: Occupancy, equipment, marketing, owner compensation
Then, complement this information with reports from your practice management or analytics software to dissect revenue categories: frames, lenses, contact lenses, exams, others and, optionally, insurance. Ideally, separate the insurance checks into the categories above, but if that’s not possible, make a new category.
Remember, this exercise is about getting a clear picture of your financial health, so don’t get lost in the minutiae.
Setting Realistic Budgets
Examine your growth over the past three years to set realistic expectations for the future. Budgets should be more science than art, so use your average growth rate as a guide and adjust based on last year's performance and any specific growth strategies, such as adding another associate doctor.
Strategic Planning for Growth
With a draft budget ready, it's time to strategize for growth. Now is an excellent opportunity to involve your team in the planning process. Their input can be invaluable in identifying areas for improvement and innovation, so be sure to incentivize their participation.
Effective Cost Management
Now dig into each expense category. There are comprehensive courses on effective inventory management, but let's focus on the essentials. Review all your manufacturers and ensure you are receiving appropriate discounts, particularly if you're part of a group purchasing organization or alliance. Also, consider how you're allocating your contact lens business and whether you're maximizing growth or loyalty rebates. Splitting your business among too many manufacturers is a leading cause of profits slipping through the cracks.
Embracing Technology for Financial Management
Now is the right time to invest in technology connected with financial management systems. As a co-founder of GPN Technologies, I’ve seen firsthand how the right tools and data can transform a practice's financial health and are crucial for informed decision-making. If this exercise was laborious, invest in tools that will help get your P&L and KPIs (key performance indicators) in order.
Preparing for the Unexpected
When crafting your budget, it's wise to plan for unforeseen events. Set aside funds to cover emergencies or unexpected disruptions so that your practice remains stable and resilient regardless of power outages, weather events and illness.
Engaging Your Team in Financial Goals
Finally, bring your team back into the practice’s financial goals now that you have a budget. Share the vision and the numbers to foster a sense of ownership and accountability. When the team is engaged and understands the financial objectives, they're more likely to contribute positively to the practice's success.
Conclusion
Effective financial management through budgeting and planning is crucial to the success of any practice. Starting this process may seem challenging, but the right tools and mindset can lead to significant growth and profitability in 2024. Remember, support is always available if you need further assistance or guidance.
