Three simple steps to Financial Budgeting and Reporting

By Stuart Chan from Cutcher & Neale

How did your practice perform financially last year?  What could you be doing now to improve your performance this financial year?

The first thing to understand is that you can’t improve what you can’t measure, so before you can take action you need to have a good feel for the numbers in your practice.

Here’s a simple three-step process to give you a meaningful snapshot of those numbers.

Step 1 - Budgeting. This can be as simple as using the prior year’s financial figures, rounding them to the nearest thousand and making any obvious adjustments as required e.g. a new rent figure. The budgeting process is about setting a comparison figure. Annual budget figures can be divided by twelve to get an average monthly budget.

Remember, the budget is simply a starting point and need not be too detailed. It can (and should) be updated as circumstances require. One of the many benefits of even simple budgeting is cash-flow management. It allows you to identify specific income and expense patterns and plan accordingly eg. when GPs are taking leave and there is an expected drop in income.

Step 2 - Reporting. Most practices already prepare basic profit and loss statements to prepare Business Activity Statements, so the actual reporting is almost complete. Some adjustments may be required to ensure that the categories of income and expenses that you are reporting on are the same as what you budgeted on.

The second stage of the reporting process is to compare the actual numbers to the budgeted numbers. This simple ‘budget to actual’ review is effective in highlighting areas to address. Variances shouldn’t be viewed as either bad or good. Instead, they should be reviewed to determine the reason for the variance. For example, a large expense variance may be due to a timing issue such as lump sum payments of insurance.

Step 3 – Reviewing. Check the budgeting and reporting process and make adjustments. The reporting may show a consistent negative variance indicating that either the budget needs to be adjusted or there maybe some underlying income or expense issues that need to be investigated more thoroughly.

For more information on services available from Cutcher and Neale, visit www.cutcher.com.au