Creating Your Sales Forecast and Operating Budget: Two Critical Financial Tools You Must Have!
As we start the new year, we wanted to make sure your practice starts off on the right foot. Creating a financial forecast and an operating budget is a critical step to set yourself up for success and growth – and we are ALL ABOUT solutions, efficiency, and profitability.
According to the 2019 MGMA Datadive Cost and Revenue Report, non-surgical practices have experienced increases in operating cost over double the rate of revenue increase. Stop and think about that. If revenue grew 10% and expenses increased 20%, this one piece of information is a pretty compelling reason to have an operating budget don’t you think? In fact, an operating budget is the MOST important financial planning tool a business has, and sadly, most don’t.
That’s why we are going to go through how to actually build a forecast and budget, and cover the fundamentals you need to know for both.
Before we dive in, let’s review the terms and what they mean:
Tips to Build Your Forecast
A forecast is a model showing the expected result of how your company will perform. But honestly, it is a best guess based on facts collected and believed to be true. It is a clear understanding of your revenue potential and becomes the roadmap for your business.
An operating budget uses your forecasted revenue and expenditures (not just expenses) over a set period of time. A budget is vital in terms of managing the end result and outcomes.
As mentioned above, a forecast is your predicted revenue, and a budget encompasses your revenue AND expenditures. So, you must start with the forecast.
The first thing you need to know to build your forecast is your revenue per hour per category of service in your practice (see the previous blog on determining your revenue per hour here). Only this time, you will be doing a company forecast vs. a provider forecast. The company forecast will have the categories of services (see the previous blog on this topic to review here) that you provide and your revenue per hour per service.
Next, you’ll determine the number of hours available to sell, multiplied by the number of resources per category. Your maximum potential is the revenue per hour by each category multiplied by the fully staffed, maximum available resource* hours dedicated to each category.
Maximum Potential = Revenue per hour per category X maximum number of staffed resource* hours
*Resource – treatment rooms and/or device dedicated to each specific category.
Once you determine these numbers, you then will want to look at some benchmarking data. Go back and see how you performed over the last three months or six months or whatever time period you want to use. Then, you can determine, based on the reality of your company, whether or not you can increase your forecast based on the additional hours available that you’re not utilizing.
So, first, you multiply your revenue per hour of each category of service by the number of hours you have available to sell. Then, multiply that by the number of resources or rooms you have available. Finally, multiply 100% of those available hours to sell by each category and that will give you 100% of your potential revenue.
Now, compare that to what you did over the past 12 months and that becomes your baseline for creating your forecast. You can increase your revenue per hour, or increase your productivity based on what you believe you can realistically do. This becomes your forecast for the next 12 months.
APX by Terri Ross, our new integrative, solutions-based training platform, has a built-in tool called Abacus that features proprietary financial optimization calculators to help you easily determine the necessary financials to create your forecast and budgeting. This is just one component of APX’s comprehensive platform/web-based software. To learn more we invite you to book a demo, here.
Tips to Build Your Budget
Now that you’ve created your forecast, you can use that to create your budget.
There are five pieces of information you need to create a budget:
Your forecasted revenue
Your current cost of goods and current cost of labor based on your revenue and service categories
Your current expenses, which you can pull from your Profit & Loss statements.
You then need to drill one more layer Rossn and add in any monthly recurring payments or expenditures you have (for example your lease payment or loan payment) because a budget should also inform you of your cash flow. Profit does NOT equal cash flow.
Finally, one important tip is you should always start with a month “zero.” There are 12 months if you are doing a yearly budget so start with a month “zero” that includes what your ending amount of cash was from the previous year or ending point of the last budget. Then, that will flow right into your new budget and you’ll have a cash flow statement.
This is just a brief overview, and I know this gets super confusing and you might feel a little bit frustrated or lost when it comes to forecasting and budgeting. This is frankly where many clients start to pull their hair out. Trust us, you are not alone. That is why we designed and developed a comprehensive Financial Foundations course to walk you through every step of the way and give you the tools, resources, instructional videos, and calculator you need to develop your forecast and budget. This course is included in APX’s Train component, and the proprietary financial calculators you need are part of APX’s Abacus component. To learn more, we invite you to book a demo here to see how this platform can help you be more efficient and more profitable.
Here is a little reference chart that summarizes the information nicely for you.
I invite you to join us this Monday, February 1st, 2021 for our free webinar, led by me, How APX Will Transform Your Practice. We have two sessions, one at 12:00pm PST (3:00pm EST) and one at 3:00pm PST (6:00pm PST).
Can’t wait to see you there!