PracticalDermatology

When it comes to strategic planning and goal setting, the past 18 months have been extremely challenging for practice owners and managers. Uncertainty about the future has left many feeling like they have less control than before. Unfortunately, this “fear of the unknown” can bring hesitancy and inaction to the planning process because it raises the question: “What’s the point in planning if everything is changing so rapidly?” But there is most certainly still value in planning. In fact, one way to bring back some sense of control is planning through financial forecasting.

What is Financial Forecasting?

Financial forecasting is the process by which a business plans for its future revenue and/or net income goals. Forecasting is often completed in the fourth fiscal quarter (Oct. 1 – Dec. 23) in preparation for the following year, but it does not have to be performed then. It can be completed at any time and done for a particular month, quarter, or even a partial year.

Forecasts are a best guess at future outcomes based on historical performance and information available at the time. They don’t have to be 100 percent accurate, but once completed, every effort should be made to accomplish the practice’s forecasted goals. However, some adjustments are likely as additional information comes to light or circumstances change. Knowing that, it’s best to begin at some level and adjust as needed.

The forecasting process does not have to be scary—even in our unpredictable times. To get started, follow these simple steps:

Step 1: Historical Evaluation

The first step in the forecasting process is to gather and assess historical revenues and expenses. Below is a sample list of information that could help with this:

• Financial statements—both year-end and monthly (if available) to account for any seasonality that might exist
• Provider productivity reports
• Space and equipment leases
• Marketing plans and expenditures
• Insurance expenses
• Other significant items of revenue and expense

If the previous time period used for historical evaluation is deemed abnormal (i.e., the year 2020, and even more specifically, the second quarter of 2020), then consider using multiple years of data. It may be more appropriate and provide greater confidence in the reliability of the information.

Step 2: Future Considerations

The next step is to think about the different factors that could impact future practice performance. If the practice has recently completed a strategic planning session, these considerations may have already been identified through a strengthens, weaknesses, opportunities, and threats (SWOT) analysis or something similar. If not, consider the following factors:

• Market conditions such as the state of the economy, demand for offered services, and external threats and opportunities
• Anticipated price increases for goods and services
• Internal changes to products or service offerings
• Planned expansion or contraction of facilities
• Additions or reductions in providers and/or provider hours
• Changes to the provider compensation structure
• Addition or reduction in support staff
• Salary adjustments for existing staff
• Significant increases/decreases to marketing plans and subsequent spend
• Planned capital expenditures or new equipment purchases

Step 3: Forecast Creation

Armed with historical data and a list of future considerations, the practice can now create its financial forecast for an upcoming time period. Many options exist for financial forecast templates. A quick internet search will reveal numerous Microsoft Excel templates, and some software versions of QuickBooks even have forecasting features built in. Use the template that works best for the practice.

Next, to fill out the template, forecast for the following items.

Revenues. Instead of attempting to forecast overall practice revenue, start by performing smaller forecasts by service line or provider. To begin, use historical revenue numbers and then factor in future considerations to project revenue for the upcoming time period. Since the goal of most practices is to grow, these projections are typically higher than historical figures. However, at times, decreases in revenue may be warranted. For instance, an anticipated decrease in the number of hours a provider will see patients could result in lower revenue. Ensure that ancillary revenue streams such as rental income or research income are accounted for in the same manner. After projections have been completed for all existing providers and service lines, move on to projecting new revenue streams, being mindful of having realistic expectations for first-year performance.

Expenses. Forecasting expenses is done in the same fashion as revenues. Start by reviewing each expense line of the practice’s profit and loss (P&L) statement. Depending on the level of detail provided on the P&L, it may be necessary to collect additional information to better understand what makes up each category to ensure accurate projections.

Within each category, assumptions should be made regarding anticipated changes. Some of those changes will be independent of forecasted revenue adjustments (e.g., an increase in rent). Conversely, others will change because of them (e.g., an increase in provider productivity will most likely bring a proportionate increase in cost of goods and/or medical supplies and, possibly, provider compensation).

Capital expenditures. If the practice plans on making capital purchases in the upcoming time period, those expenditures should be a part of the forecasting process and the resulting impact on revenue and expenses (e.g., interest, if taking out a loan) taken into account.

Step 4: Monitor and Adjust

Once steps one through three are complete, schedule time each month to enter monthly actuals and assess progress toward forecasted goals. The main advantage of doing this frequently (e.g., monthly) is that it allows for timely intervention should revenues start falling behind or expenses begin exceeding the forecast.

Since time was dedicated to forecasting revenues by service line/provider and expenses by line item, it should be rather straightforward to uncover exactly where the practice may be over- or underperforming relative to the forecast. For instance, monthly actuals may show lagging retail sales compared to the forecast. Knowing that, a plan can be quickly developed to boost sales through staff contests or an increase in marketing efforts in order to get them back on track.

As previously mentioned, every effort should be made to achieve the goals set forth. However, sometimes, adjustments are needed. For example, a provider leaving unexpectedly would undoubtedly influence revenues in the short term. Likewise, the provider’s associated expenses (e.g., compensation) would need to be adjusted. Once the scope of impact is identified and adjustments are made to the forecasted revenues and expenses associated with that provider, the effect on yearly goals will become clear. Armed with this look into the future, both a short-term and long-term plan can be developed to cover the financial impact of losing a provider.

If this step of regularly monitoring and adjusting is adhered to, no surprise or setback will bring about the same level of uncertainty it has in the past.

Positioning for a Better Future

The ripples of what has happened over the past 18 months will be felt for some time. This makes it easy to dwell on the past and difficult to look ahead. However, finding an area to regain a sense of control can bring much-needed comfort in uncertain times. With a little preparation, planning, and diligence, financial forecasting can help ease today’s “fear of the unknown” and position practices for long-term success.