If you have followed my articles with some interest, I am sure by now you must have realised how important it is to analyse your practice’s financial performance by using certain techniques.
In this article I will discuss why it is important to have predetermined targets to measure business performance, and how such targets can be used in managing costs and revenue. The absence of predetermined targets will not indicate whether you are on course to achieving your financial objectives for your practice. Therefore, it is important to have them.
The best form of a predetermined target is an annual budget, which should be in line with your financial objectives for your practice. In brief, a budget is an operating plan for the business based on the available capacity and resources and should reflect the financial aims of the owner.
It should have revenue targets, expenditure ceilings, profit targets and cover operational aspects such as budgeted number of surgery hours for each calendar month of the budget period.
The availability of a budget will enable you to set revenue and cost-management ratios that I introduced in my last article. Some key budgeted ratios that you should have are:
• Budgeted efficiency ratio – budgeted profit as a percentage of budgeted revenue. This is an important measure, especially if the actual level of activity is different to the budgeted level of activity. For example, if the actual level of activity has increased, it may result in a higher profit in comparison to the budgeted profit.
Although you have beaten the budgeted profit target in this instance, it is important to know whether the practice was run efficiently. This can be done by comparing the actual efficiency ratio with the budgeted efficiency ratio.
• Budgeted hourly running costs. All budgeted overheads and costs can be expressed in terms of hourly rates by dividing such costs by the number of budgeted earning hours. Budgeted hourly running costs can be computed for major practice overheads such as employee cost, rent and finance costs, or these can be computed for each expenditure category such as admin expenses, premises costs etc. These budgeted hourly rates can be used in measuring actual performance by comparing them with actual hourly running costs.
• Hourly budgeted profit and loss. As discussed in the previous article, hourly budgeted running costs can be presented as a pie chart and translated visually as a clock to see at what stage in each hour you start to make money. The budgeted hourly profit and loss can be compared with the actual hourly profit and loss.
Alternatively, you can use a daily budgeted profit and loss account presented as a clock, based on the total number of hours available per day. This is a very useful indicator and will show whether your hourly performance is in line with the budgeted hourly target.
Use of budgeted ratios in managing revenues and costs will enable you to ascertain whether your practice’s actual performance is in line with the budget. In other words, it will indicate whether current level of performance will result in you achieving the budgeted profit target or not.
By analysing actual performance in comparison to the budget on a monthly basis, you can identify the areas that need your attention. This will enable you to better manage the limited time available to oversee various key aspects of the practice.
Irrespective of whether you are engaged in NHS or private dentistry, you can use this approach in managing costs and revenue and it will help you achieve the financial objectives for your practice.