A business budget is not a way to stop you spending money, writes Chris Sheedy, but instead a method by which you will recognise patterns, plan for the future and make earnings growth happen.
Accountant Kerri Dickman once had a client ask why they weren’t making a decent income from their business. “He was widely recognised as the best in his field,” says Dickman, a principal of Canberra accounting business Kerri Dickman & Co. “His prices were twice what everybody else’s were because he was so well respected. But he asked me why he couldn’t make even $1000 a week.”
Dickman asked if he knew how much he was taking out of the business. He didn’t. After a little investigation, she discovered his household rent was coming out of the business account. So were the fees for the expensive private school his children attended. So was his car lease, and his wife’s car lease, and his wife’s hairdressing bills, and lots more. “When I started listing everything he was taking out, it quickly added up to over $4000 a week,” she says. “So he didn’t have a business problem, he had a lifestyle problem. And because he wasn’t tracking how much he was taking out of the account, he wasn’t aware of that.”
The story goes some way in illustrating the power of a business—and, for that matter, personal—budget. But according to Julie Parker of Julie Parker Dental Management, few in the field of dentistry utilise a budget within their business. “It is actually rare that I see practices or dental practice owners working to any kind of budget,” says Parker. “Practices that have been around for a long time might have some sort of budget so they are aware of their expenditures. But a lot of them don’t pay so much attention to figures until the end of the financial year.
“Younger dentists may have had guidance from an accountant, or may have started off with a budget, but they usually don’t look at it regularly. You can speak to them half way through the year and ask where they are in line with their projected income and expenditure and they would have to look it up.”
The problem with the word ‘budget’, says Parker, is that it has negative connotations. When we first had to budget in our lives—saving for a home deposit or buying our first car—it was all about going without. But a business budget is something that empowers a business to grow and that shows
a business owner how and where they can make more money, stop wasting money, and spend more effectively. Most importantly, a budget helps the business owner make decisions based on what is actually possible, rather than guesswork.
“Develop a budget and you will naturally focus on specific areas of the business and begin to recognise patterns.”—Kerri Dickman, Dickman & Co.
“Rather than ‘budget’, I prefer to use the word ‘projection’,” says Parker. “It is about looking towards the future and recognising possibilities and knowing the impact on the business if you put something in place.” Dickman says, “A budget empowers you. It gives you an ability to see what is coming. It gives you a lot more insight into your business and what drives it, and therefore what you should focus on. It also helps you overcome lumpy periods.” The very act of developing a budget makes you focus on important areas of your business. “It’s like when you buy a new car and suddenly, quite subconsciously, you begin to see that model of car everywhere,” says Dickman. “Develop a budget and you will naturally focus on specific areas of the business and begin to recognise patterns.”
The more detail in your budget, the more accurate your planning can be, but your budget does not need to be an enormous document containing thousands of numbers. In fact, the simpler it is, the more you’re likely to utilise it—consider starting with a couple of items such as income, wages and dental supplies. Once a budget is in place, ensure it works hand-in-hand with KPIs within your business, advises Dickman. For instance, track figures such as how many patients you see each week, how many bookings you have next week, and how many gaps you had during the week. Compare this week to last week, and look for patterns such as what happens during school holidays. All of this can be useful for planning staffing levels, leave allowances, and more.
There are plenty of accounting software packages that will help with your budgeting, but Dickman and Parker both recommend the simplicity of an Excel file. In fact, you should be able to request a pre-formatted Excel file from your accountant. “Reviewing your budget every month affords you the opportunity to rein in spending where needed and promote better production where needed, without allowing your goals to become out of reach due to discoveries made too late to take effective action,” says Parker. “Above all else, constructing a budget and reviewing it regularly gives you control.”
A budget how-to
Here, Julie Parker outlines the best approach to developing a budget for your dental practice:
- Develop a spreadsheet of all expenses and income using profit and loss reports from your accountant or bookkeeper. Averaging three years of figures allows for fluctuations. Most businesses you deal with will put their prices up in accordance with CPI, so include this rise in expenses.
- Have a look at the year coming up. Are you adding additional employees? Are you taking on additional costs to previous years?
- Assess your presumed income. Are you planning on increasing your fees? Are you adding or withdrawing any services that will impact on your turnover? Are the current dental providers who generate fees remaining stable, or will there be additional or reduced productive hours?
- Look at what your turnover is in comparison to your expenses. Determine what your desired profit margin by the close of the financial year will be, then look at the final figure you have to work with. From there, it is a process of mindfully determining where to best spend this amount to either maintain your current business state or implement a growth plan to improve it.