Pop quiz: How long have I been writing that private medical practices are businesses, whether we like it or not; and like any other business, they require consistent, sensible business management?

If you answered that I’ve been harping on that point from the very beginning, congratulations; you’re a long-time reader. And yet, the most basic and important business tool – preparation of an annual budget – continues to be ignored by most private practitioners.

The usual excuse is lack of time, and besides, the practice seems to be doing fine without one; but like anything else, you can’t fix problems you never look for.

You can’t identify needless, wasteful, or redundant purchases, under- or overstaffing, or misappropriated funds if you don’t track your practice’s expenditure data.

There is no way to make intelligent decisions on such basic issues as fee adjustments, new equipment purchases, and marketing strategies without a firm grasp of your expenditures, and a reasonable idea of where those numbers may be going in the foreseeable future. Without a budget you cannot know your costs of doing business, let alone whether they are too high or too low. Chances are excellent that you are overpaying your taxes, too.

Embezzlers typically continue their nefarious ways far longer than they should (and some are never caught at all) because all too often, nobody is watching the budget numbers. And if you are planning a refurbishment or expansion, no self-respecting bank will approve a loan in the post-TARP era without seeing a well-organized budget.

There is no need to wait to take action until, one day, your cash flow is too low to meet payroll, or a similar crisis convinces you that budgeting is important. Now, at the beginning of a new year, with last year’s financial data accumulated and readily at hand – and before significant changes mandated by the recent health care reform legislation take effect (more about that next month) – is an ideal time to get a budget in place.

If your practice is incorporated and your fiscal year does not begin on Jan. 1, don’t use that as an excuse; draw up a limited, "partial" budget for the remainder of this year, then start a new one when your next fiscal period begins.

Creating a budget is not the formidable or expensive task you may be envisioning. Unless your practice situation is unusually complex, you can probably do it yourself – although, if this is your first time, you will probably want to enlist the help of your accountant. A good spreadsheet program like Excel or iWork simplifies the process considerably, and financial software packages like QuickBooks or NetSuite make it even easier. (As always, I have no financial interest in any company or product mentioned in this column.)

Start by creating a list of practice expense categories, or "chart of accounts" (COA) in financial lingo. Each component of a COA is called a "line item," and in general, the more line items, the better. Commercial software products typically provide a standardized COA, but you will want to customize it to your individual needs. (Your accountant can help with that.) This is a critical step, so take your time, and do it right. The more detailed you make your COA, the more flexible your budget will be, the easier it will be to identify deductible expenses at year’s end, and the harder you will make it for an embezzler to operate unnoticed.

Then, using last year’s records (or if possible, an average of several years’), assign a dollar amount to each line item. Right away, some rude surprises may be in store ("We spend how much on printer ink?"), but already you are gaining valuable information that can be acted on immediately.

If you are not sure whether you are over- or underspending on a specific line item, or the category is a new one and you don’t know how much to allot, check with local colleagues or your accountant. Some practice management firms post lists of "benchmarks" averaged from surveys of their clients. Benchmark numbers can be deceptive, however, especially if the surveyed practices are in different parts of the country or have different socioeconomic populations.

Creating a budget is only the beginning; periodically, you must compare your actual expenditures with those you budgeted. (Most businesses do this quarterly; more frequent reviews can trigger needless worry over normal short-term fluctuations.)

Look for significant discrepancies and the reasons for them. Are your expenditures excessive, or was the budgeted amount unrealistic? Adjustments (of both expenditures and budget) will be frequent at first; but as time passes and your financial management skills improve, your practice will sail along on a progressively smoother financial course.

Finally - A Budget