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two budgets

You Need Two Budgets – Personal and Business

Developing practical and realistic budgets for both your personal and business lives will help keep you on track and give you a benchmark for measuring progress toward your financial goals.

Developing a budget and cash flow is an essential part of the business plan. It also may be required by lenders before you can borrow money. Even if you don’t plan on opening or buying a practice, you should have a solid understanding of your finances.

Your business budget and cash flow projections should illustrate:

  1. how payments will be collected from patients
  2. how expenses will be paid

Establish a Practice Budget

Creating an initial budget focuses on projecting revenue and expenses for a period of time (usually a year). So your practice budget should be based on revenue - what your practice has earned, not necessarily what you have collected and deposited in your operating accounts.

Your budget should also show where and how fees will be billed and how expenses will be incurred. During your first months of operation (when revenue may not be as large as expenses) the budget should also reference where cash will come from if your business does not have the cash flow to cover your expenses.

The main objective of a budget is to show the total income for a given period greater than or equal to (break-even) your expenses.

Develop a Cash Flow Projection

In addition to the budget, a cash flow projection should also be developed. The primary difference between the budget and cash flow is the timing of when the fees billed for the services will become cash collected and on hand and expenses will be paid in cash.

For example, for a service rendered, revenue is created based on the fee charged for that service. However, that fee will not become cash until it has been billed, received and deposited in the bank. Sometimes the difference between billing the fee-for-service and receipt of cash can be as long as 90 or even 180 days.

While you're waiting for the billed fees to turn into cash, you must have cash to pay the bills for the practice, including your salary. It may be necessary to bridge that gap with a short term loan (called a working capital loan) from the bank until the cash arrives.

Understand the Break Even Point

An important consideration in formulating the financial part of the business plan is the break even point for the practice - which is when the practice is generating sufficient cash to pay all of its bills. The first step is to determine how much cash has to be collected to pay all of the monthly expenses of running the practice, including the doctor's personal living needs.

If the monthly expenses are $10,000, then the practice needs to collect $10,000 in cash each month to meet its obligations. The practice may bill $10,000 in revenues, but it has to collect all $10,000 if it is to meet its obligations. Odds are that only a portion of the billings for a given month will be collected in that month, with the rest being collected the next month, some the month after that, and some maybe not all. The breakeven point is when the practice has produced sufficient cash to cover all of its obligations.

Your Personal Budget

Estimating Your Living Expenses

Make a list of your personal expenses for an average month. Start with fixed expenses (same payment each month), such as:

  • rent or mortgage
  • car payments
  • student loans

Include periodic expenses as well (those that may not be paid monthly - life insurance, car insurance, car registration fees) by dividing them into monthly costs.

Next, list variable expenses such as:

  • phone or utility bills
  • transportation (gas, repairs, etc.)
  • groceries
  • dining out
  • clothing
  • entertainment

These amounts may change month to month, so find an average for each item and include that figure. The total of both fixed and variable expenses will be your total monthly expenses.

Establishing Your Salary

Once you know your monthly expenses, you have a good idea as to where your income needs to be to make ends meet. If you are already earning income, you can use your current earnings to see how you are doing on a monthly basis. Always use after-tax figures, which is your actual take-home pay.

If you are estimating your future income, set a realistic amount you can expect to achieve - not too low, but not excessive. No matter what business structure your practice takes, it's important that salaries or draws be established so the proper payment is made for all of the various taxes and other obligations. Living out of the practice cash register is very dangerous - so set a salary you can live with.

Do the Math and Set Your Goals

Now that you've established a salary and made a list of monthly expenses, you're ready to put the budget together. Subtract your monthly expenses from your monthly income and see where the total falls.

If the sum is below zero, you'll need to trim some expenses. Look at your variable expenses and cut items that you could live without if necessary, such as entertainment, dining out, or cable TV. You won't need to do without these extras forever, but doing so today could help position your practice for success that will reward you long-term.

There are many resources to help you with your personal budgeting process. Many will allow you to track your monthly expenses and help you examine your spending habits and make suggestions to help you live more comfortably within your means.

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