The Joy of Budgets by Alun Rees BDS

I remember visiting the bridge of a cross channel ferry on a friend’s stag day, this was in the period when the stag celebration was longer than a night but hadn’t reached weekend status. We set off from Dover heading for Calais and a long lunch, and then someone knew someone who got us on to the bridge.

Apart from the fantastic view, what impressed me was the use of computer navigation predictions. These took the current velocity and position of our ship and all the other ships in the channel and predicted their future positions and the risk of collisions if courses were maintained. As the navigation officer explained it was a lot easier to make a slight adjustment sooner than have to try to make a massive one later.

Most accounting systems are great for telling you where you have been, which is fine for tax accounts but not so good for telling you where you are heading. You can’t drive if all you use is the rear-view mirror.

Cash flow is the key to survival and success, and any system which fails to predict and monitor cash flow and will not let you establish and manage budgets will make life and survival more difficult. So I will frequently get a client to stick to a well-formatted spreadsheet before getting involved in any more complicated systems.

If I have to make just one argument for using budgets in any business, it is “to anticipate, understand and take control of your direction”. One problem with dentistry is that historically the business model was, “patient presents with a problem, and dentist fixes it”. This implies that we are dependent on the misfortune of others and their disease process for success. This may have succeeded when dealing with a population with rampant and uncontrolled caries at a time when costs were lower but will only lead to a crisis now.

Many are similarly reactive in their business management and I still meet dentists who sail on, presuming the wind is taking them in the right direction and hoping that the month will run out before the money. These individuals often survive with half of their lives in the red zone of an overdraft, hanging on by robbing Peter to pay Paul. Survival is their way of life, micromanaging and counting the days.

For success, a proactive approach brings greater and more predictable rewards. One element of this is the use of a budget as part of your business planning. “A budget is a plan to control your finances,” says James Caan. If you don’t have a detailed and routinely monitored business plan then I would remind you of the words of Sir John Harvey Jones, “The nice thing about not planning is that failure is a complete surprise.”

Most businesses at their start up and before any expansion or significant change will be expected to do some financial forecasting to show a potential source of finance that they will be able to afford to repay any loan. It gives the message that the borrower is responsible enough to have considered the future. Unfortunately once the loan is in place many revert to “hope for the best” mode, especially if their predictions turn out to have been somewhat optimistic in the face of reality.

At a time when many practices are, or should be, considering their options regarding commitment to the NHS taking a long hard look at what changes you could make and what fees you would need to charge can help to clarify your decision.

However phrases like business planning tend to make many dentists hurry off to seek the distraction of teeth muttering, “I didn’t train to run a business I’m a dentist and to look at such things is distracting me from my patients.” The objections continue, “It takes too much time, life gets in the way and I feel disappointed when we can’t stick to the plan, healthcare shouldn’t be about setting targets, it makes me feel controlled”.

On the contrary using budgets gives you control, vision and saves time. By comparing the truth with the imagined you are able to measure your (financial) progress towards your goals. Indeed a budget is the only way to ensure your business has a future. As for setting targets, well we all must have some even if they only consist of a roof over our head, clothes on our backs and food on the table. The alternative is to stick your head in the sand.

The basic tool needed for budgeting is the spreadsheet and the most common descendant of VisiCalc (the one that was the first used on a computer) is Excel, although there are other perfectly adequate programmes for Mac, Linux & PCs. A few hours training - if only to know what elements you don’t need - in the use of Excel will repay you many times over.

How to do it. Take your next financial 12-month period month by month and establish two columns for each month across the page.

On the left hand (vertical) axis load the headings of your outgoings, probably those your accountant has previously used. Use a line for each category or sub-category, for instance, will probably want to be able to load individual laboratories and staff members.

The first rows should be for income, examples used can be membership scheme fees, principal, individual associate and hygienist incomes. Use it to anticipate drops in income with holidays, courses and maternity or paternity leave. Will you need a locum or can you manage? Can you book another holiday? Is it time to reduce your clinical commitment?

Time to put in the expenditure or outgoings. Firstly come the fixed costs that you can do little or nothing about, so load rent or mortgage repayments, equipment loans, heating and lighting, insurances, business rates and maintenance charges.

Next, bring in the variables, salaries, laboratory fees, associates, materials, telephones, marketing and everything else that it costs to run.

Finally, think about what investments you are likely to need or want to make. This requires honesty with yourself and is a big part of your planning for the next year. Ignoring the fact that a chair will have to be replaced, the computer hardware is due for an upgrade or your team’s need for professional development is only avoiding the issue.

At the same time, you should also be preparing a budget for your personal life which will include the essentials and also holidays and other discretionary purchases. Your drawings from the business plus a plan to put aside money for income tax should also feature in the business plan.

Set up cells where monthly income and expenditure are shown and finally at the bottom of the page the difference between them. The legendary bottom line.

In the second monthly column start loading what really happens. Now the work of keeping it up to date starts. As income and expenditure become “real” load the figures and compare with the budget.

As time progresses you can introduce Key Performance Indicators (KPIs) into your main or supplementary spreadsheet where you can look at individual treatments, new patients, referrals and surgery activity, profitability, chair occupancy, failure and late cancellation rates of individual dentists, therapists, and hygienists.

Once you have your first quarter completed then you can start benchmarking performance.

With information at your fingertips, it is easier to make decisions. Need to consider longer hours, expanding or contracting the team, changing the way you pay associates or introducing different treatments and marketing plans? All can be tried and measured on your budget planner. The plan is never rigid; it must be reviewed and revised when necessary to reflect changes.

To return to the ferry analogy if you do need to speed up or (in the event of running the UDA system) possibly slow down you can see when, by how much and in what way.

If you would rather sail without a compass, chart or GPS then carry on. If you want success get on board.