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Jesse Arnoldson:
Welcome to the MedMan podcast, a podcast focused on helping you level up your practice. I'm Jesse Arnoldson.

Jay Holmes:
And I'm Jay Holmes through interviews with some of the most successful leaders in the industry. We help uncover resources, tools and ideas to help you level up.

Jesse Arnoldson:
Thanks for tuning in and we hope you enjoyed today's program.

Jesse Arnoldson:
Hey, everybody, welcome to the MedMan podcast, this is your host, Jesse. This week we're going to try something a little bit different and dive deeper into a couple of very important topics that are top of mind, right now. I'm joined by our very own Jay Holmes. We're going to be discussing something specific to finance. Here at the end of the year, we're all scrambling to close up 2020. All of our finances, our books, our month and year-end. But we're also looking on to 2021. And right now, if it isn't top of mind for you, it should be. We're going to be talking about budgets. Jay, welcome to the podcast again.

Jay Holmes:
Jesse, thanks. Man. It's good to be on the other side of the mic here.

Jesse Arnoldson:
Absolutely. Well Jay, like I said in the introduction, we, this is something that that should be top of mind for all practice managers. It's got to be weighing heavy. I wanted to dive deeper into a discussion with you about budgets, why they're important, and what they can actually do for us as well as best practices. First of all, let's just talk about the reasons why we would need to be putting together a budget for 2021.

Jay Holmes:
I think budgets could be one of those, I don't know... most people think of a budget as a punishment tool and they use it to measure how bad you are, how bad you are at predicting and unfortunately.

Jesse Arnoldson:
Or to say no, like no to everything.

Jay Holmes:
Yeah, absolutely. And there's just so much negative connotation around budgets. But in my mind, budgets are one of the best tools that a manager has. Because it forces us to think about how our organization interacts with certain things, income, and expenses. And then it allows for a process of reflection. And when you make assumptions, then reflect on what actually happened and then revise those assumptions. That's how you learn. And oftentimes when you run a business, you've got these ideas in your head about how things really work, but you don't really come to reality and say, no, actually this is how it works because the picture is always a little bit brighter and nicer in her head rather than reality. But a budget does that. And I think the more we can face those facts, the better manager we can be, better decisions we can make.

Jesse Arnoldson:
Absolutely. I think it keeps it close to the business. Right. you talked about reflecting if you can go a few years or many years without taking a look at your books closely like that, like what it requires you to do in creating a budget. Expenses can get away from you. The pulse of the practice, the revenue, the expenses. It can just you can become disconnected. If nothing else. It's a great exercise to keep you close to what's going on and help you make better decisions you talked about.

Jay Holmes:
You bet. For most people, myself included, you always think revenue is higher than it is and you always think expenses are less than they are. And so just because that's what we do, you know, we're human beings. So we want that rosy picture in our mind. But in facing the fact that revenue will be a little less than you think and expenses will be a little bit more, that's OK. Because if you don't have that reality, then it makes it even harder to forecast and make good decisions. And something else just to throw in there that oftentimes we're in an add, add, add mentality. And very few times do we stop and reflect and say all those things that we added, the subscriptions or this added cost, we don't really stop and say, is that still needed? Is that still creating value? And this is an opportunity for that as well. Say, man, you know, we've got five different subscriptions for continuing education or this or that, and all of them are really doing something for us. Maybe we should pair some back. And this is a great time to reflect on that, too.

Jesse Arnoldson:
Absolutely. One thought I had Jay, I'd like to get your kind of feedback on. I was talking with the manager the other day, like, look, man, I'm just not a finance guy. That is just not my thing. The doctor loves that kind of stuff. So I just let her do it. And, you know, since our conversation with that manager, I've been thinking about the fact that none of the decisions we make in a practice exist in a silo. Like there's no marketing decision that it's just a marketing decision, no HR decisions. It's just an HR decision. All of these things are connected. And so if you are not a people person or not a finance person, you can't be making great decisions if you're thinking about these things in silos. So if you're making operations, marketing, inventory at people, people, decisions without some sort of financial implications included, you're doing a disservice. Any thoughts on that?

Jay Holmes:
Yeah, absolutely. My background, of course, is accounting and accounting is the language of business as accountants say it. And it's not that practice managers need to know accounting in-depth or finance and depth, but you certainly need to know how to read the book. And by reading the book, you're gaining information and to say that I'm going to leave the finances on one side. The unfortunate fact is that if you're the business, the clinic isn't making money, you don't have a clinic. And so while you can make people decisions and all these other decisions, if there's no cohesion in at all so that there's profitability and money to pay for everything, then you're missing out on such a huge component, and you really, it's all interconnected and so getting that picture clear is so important. So it's not that you have to be an expert and you have to be an accountant. You have to be finance person. But you do need to understand. You need to know how to read that book.

Jesse Arnoldson:
Absolutely. Well, take us down the path of what makes up a budget. Can you describe some maybe high level or main components of what an operating budget should have?

Jesse Arnoldson:
Absolutely. When I think about a budget, I break it down to three or four parts and really most have three in. The fourth is just thinking about debt and debt servicing. But in my mind, the budget, you're really taking your expenses, non-payroll expenses, you're taking your payroll and then you're taking your revenue and you're creating forecasts in a model that you can then predict what will happen in the future. And so let's just jump into that. The non-payroll operating expenses kind of walk you through what I generally do. And accounting software these days makes it pretty, pretty easy to do this. But I like to get a twelve to twenty-four-month historical PNL and from that and break it out by month. And that's really easy to do in software like Quick Books and then use that as the basis to then predict what's going to happen in the future. I like to take a couple of different views of that. And so I'll take a column and do an average of the expenses. I'll do one with a total and then I'll have another column just to as I understand and as you build the budget, what you really need to think about in this, the nonpareil operating expenses that you've got to think through, what drives this expense and for different expenses. There are certain drivers. Sometimes it's a contract like rent or a fixed fee that that will change on a certain month of the year based on a contract or other expenses are based on volume. A lot of expenses are tied to how many patients come to the door. And sometimes it's on how many patients, how many visits, sometimes it's on how many people you have employed. And so those are the things you start thinking about to say, OK, well, if revenue goes up or patients go up or payroll goes up, I can create an equation here that better predicts what will happen in the future.

Jesse Arnoldson:
It makes sense.

Jay Holmes:
You're really trying to create the dynamic budget where you've got this template and then what you can do is you can update the revenue side and everything else will interact with that. So that's kind of the first step is looking at the operating expenses. And then, of course, you can you really have two decisions of either pulling a divide by 12 and pulling it across as kind of this average expense, or you're going to have times, let's just say you have you pay real estate taxes or malpractice insurance and things like that where you want to insert those expenses when you know you're going to pay them because they're not really flat throughout the year. And so then the goal, of course, is you have the expense side done. And generally, this is the easier thing to predict because you have historical information and it's a little bit easier to predict, OK, we're going to we're going to try to hire an extra M.A or maybe another nurse. And those costs are easier because just because you have historical data and you know how much you're going to offer the MA perhaps.

Jesse Arnoldson:
Yeah, that makes sense to me. Well, tell me about the other side of the coin revenue. How how do you approach that side of it?

Jay Holmes:
Revenues can be as complicated or as simple as you want it. And the main goal here always is to come up with a model that, based on the input, gets you close to where you're going to be. And what I mean by that is that you can take a work review approach and break it down by provider and say, OK, this is how many work reviews we expect each provider to have in a given month. Or you can go as simple as for the entire practice, this is how many visits we expect on a monthly basis. Now, what is important, though, is that if you know on average that your reimbursements one hundred and sixty dollars per visit, that the next month, if you predict we're going to have, let's just say, seven hundred visits in the month and for X dollars of revenue the next month, if you hit that visit count, your revenue should be pretty accurate. And so so I generally lean to a more simplistic approach until your variance is off. And so what would happen is if you said, OK, we'll try this simple approach of just visit and then the next month you hit your nine hundred visits for seven visits or whatever that you expected, but your five to 10 percent off in your revenue. Now, that's a time to pause and say, you know what, maybe we need something a little bit more sophisticated. Maybe our assumptions aren't quite right. So let's either maybe it was the per visit. Reimbursement was off. It was a different fee schedule, new contracts to that. But the goal is to get about a five-ish percent variance of if you hit your variable, which is the visit count, you should be five-ish percent from that revenue.

Jesse Arnoldson:
That makes sense. Jay how often are you comparing against your budget? How often are you looking at it?

Jay Holmes:
Budgets generally for most practices. If it's a monthly cadence. And where I see it most used is the beginning of the year, you get your budget done and then you put it in your accounting software. And that makes it really easy to compare budget to actual. And the beauty of that is that then you get a report. And oftentimes what I'll do is I'll export that to an Excel file as well because then I can actually go line by line and enter in type in what caused the differences. And it's not just so that I can report to someone else. It's so I can get a better understanding. The question I like to ask is, is the variance something explainable or is there something wrong with my assumption? And if it's one of those things where, hey, we didn't realize this and something happened out of ordinary and we incurred this expense perfect, but if it was, nothing really happened that was different than what we thought. But our expenses are higher and lower. I want to then learn from that so that the next time I do a budget, I can change my assumptions so that I can get better over time. Because the greatest thing and it just shows to me the greatest thing about a budget is that no matter what, it's going to be wrong. So as long as you go into it with that thought process, you're going to feel OK. But the goal is to be less wrong over time. It is not to do that. You're winning the game because you can never predict what's going to happen. You just can't. And so you can get close. But more you want to get better at understanding the relationships between higher volume or lower volume and growth in those sort of things.

Jesse Arnoldson:
Absolutely. You touched on something. You said. It's mainly for you to get to know and understand the business better and become a better forecaster and more accurate. But to a certain extent, as a practice manager, you are expected to present this to the physician owners. Can you maybe riff a little bit on that subject about what you should be keeping in mind as you're preparing these things for your the audience that you're going to be presenting to?

Jay Holmes:
Yeah, Jesse, you think about. And I think the practice manager's role is to give confidence to the owners about your understanding of the future, that you understand where the business is going, where the clinic is going financially, and the budget where the budget falls. And that is that the budget is your expectation, what's going to happen in the future. And so then if you use the budget, kind of rewind just a little bit and say in that monthly format of the budget to actually go through that, then what you're basically doing is you're saying, hey, this is what we thought. This is why it's not didn't happen that way. And in either this is what I'm going to do about it going forward or this is what I've learned from it. And it helps that dialogue and it really helps build confidence. And it's nothing to say that. I think that what you should be insecure about as a manager isn't the fact that you're saying, hey, the results were different, but I'm not even going to look at it and I'm not going to learn from it. You have to get past that and say, hey, this is what we thought from all the information we had, we learned something. And this is going to change our course slightly moving forward. And let me tell you how. And that that in my mind really builds confidence because you're learning as you're going and you're saying that I'm looking at this closely and we still have control. Both hands are still in the wheel here. But there was a bump. We went around. It is what we learned from it. And we're making a course correction. And I really think that it provides a good framework. And it certainly allows because I know a lot of managers get into, they get pulled into things that aren't that efficient. Like you might have a doc that comes in and says, hey, what's going on with this in the middle of the month? And it might be an anomaly. It might be just because the books aren't closed yet and things are smoothed out, but just waste a lot of time. So by going over this in kind of a monthly cadence, you're really creating efficiencies that, hey, this is the time to talk about stuff. If we want to gather questions, let's throw them in this time. And so I think that it helps in a lot of ways, set yourself up to have, you know, sometimes hard, hard conversations, other times just pretty transparent ones.

Jesse Arnoldson:
It's been my experience, Jay, that, you really have twelve times a year to be schooled in how good or how bad of a forecaster you are. That's how you have to look at it. There are twelve times a year to learn how good you are at forecasting and keeping expenses controlled. And that's not that many if you really think about it. And so you really have to take advantage of each one. The month-end process going through all of your financial statements, referring back to the budget, and then presenting back to the docs. I mean, those are golden moments to become. I know that we're not expected to become CPA, but we should become expert in this in this part in running the financials of our practices, right?

Jay Holmes:
Yeah, absolutely. Especially when you think about your own practice. I think the challenge of looking back at my career, the biggest challenge is seeing all sorts of different financial statements and all different complexities, different businesses. But really to master your own clinic. Yeah, it's not. A challenge that you can't overcome, certainly there's things that you learn and it just doesn't change that much that often.

Jesse Arnoldson:
I have a question for you. There have been times where mid-year something weird happens, like, maybe you bring on another doctor or maybe a pandemic hits. And these are things that just you couldn't have planned for, couldn't have foreseen. But they're going to make a significant difference in the financials of your business. Is it fair to change the budget? Do you ever go and try and change the budget or is it something that you keep sacred and static? What are your thoughts there?

Jay Holmes:
Jesse, Great question, man. I have tried not to change the budget over time, over this period that you said, and that's because I really do think that it helps you fine-tune and learn by really saying, hey, these are the assumptions back whenever you started. And so I tend not to change the budget. However, there are always times, you know, March 2020, certainly a good time to change the budget, say whatever we thought. Where we're going right now is not going to look anything like it, nor could we even possibly imagine we're going to go. And so really, there's no sense in comparing yourself to something that is so far out of reality. Now, are we going to have pandemics often? No, of course not.

Jesse Arnoldson:
I hope not.

Jay Holmes:
And so maybe a new provider comes in that was unexpected. So that's going to throw things off a little bit. Now, I still would then say maybe instead of if you know change is coming, and I see this a lot and I like that. Is that if you know things are going to change, if you know the change or there's just uncertainty and we talk about the beginning and you're starting a practice or you're going to bring on one, two, three providers and you just don't know how that mix up is going to happen. I often see shortening your budgeting process to maybe a quarterly time frame. And that way you can say, OK, we're going to put together a quarterly budget and we're going to run with it. We know that things are going to change fast enough that in three months we hope to have learned a lot that we can adjust again for another three months.

Jay Holmes:
So I see that as a way to get away from this rigidity of 12 months from now. We hope we can predict it. Now, there's plenty of times and plenty of practices where things move along pretty steady. And so that 12-month budget works really well. Now, I will say that I have a budget create a budget for the organization, certainly for MedMan and other organizations on an annual basis. But what I also do is I have a forecast and really those things are both the same same thing, just different names. However, I use the forecast as more of a tool that I update on a month to month basis. And that helps me better predict where we're going in the sense that I can make more real-time tweaks and kind of test new assumptions as I go. And then basically what happens is that as I'm testing new assumptions in this new model, which is the forecast by the end of the year, I've learned a lot and I've actually used the forecast on a real-time basis to then now put that into the budget. And so in really where the expenses are don't usually change a whole lot. Really, where the forecast comes in is really on the revenue side. That helps me say, OK, things are changing, maybe it's ancillary, maybe it's a provider and helps then predict just internally better cash flow and all those other things. So I try not to change the budget, certainly can minimize the budget period. And I'll usually have a kind of a forecast that complements the budget and I update on a monthly basis.

Jesse Arnoldson:
Yeah, that makes sense. I think probably a good general rule of thumb for myself. I've cut myself being tempted to change a budget, mainly to save face. I don't have as much. And so if you feel that that's probably an automatic no.

Jay Holmes:
Yeah. That is not a good reason to change your budget. Yeah, absolutely.

Jesse Arnoldson:
But to make better decisions, maybe to do a little bit better course correction. I can get on board that. That makes sense to me.

Jay Holmes:
Well yeah. It brings us back to this podcast. We both listen to it and I forget I think it was the knowledge project, but they were talking about how most professional gamblers or most just gamblers, but just poker players, most poker players, not professional, have a really hard time of getting better because they always they have a wonderful ability to blame something else. Oh, it's just a bad draw. It was someone else hit, hit it on the flop. All these things that are push out that you actually don't have control. But once you sit in the seat and say, I've got control of this, it's on me, I need to think through it, then you really start to learn. And that's really where this comes from, saying, OK, look, you said it, you're going to learn from it. Don't try to keep pushing stuff off like it's not ultimately not that you don't say that you can't get better at understanding your business. Take that ahead on and you're going to learn a ton from it.

Jesse Arnoldson:
Absolutely. Jay, thank you. This topic is incredibly important. I'm hoping our guests picked up a whole lot from it. Just appreciate all of your knowledge and insight and thank you all for tuning in today. I hope you enjoyed our conversation for the show notes, transcripts, material from the show and everything else. MedMan does head over to our website at MedMan.com. Remember will be here twice a week sharing insights, ideas and tools to help you as you level up your practice. Thanks again for joining us today. We'll see you Jay.

Jay Holmes:
All right. Thanks, Jesse.

Jay Holmes:
Thanks for tuning in to the MedMan podcast, we hope you enjoyed today's featured guest.

Jesse Arnoldson:
For the show notes, transcripts, resources and everything else MedMan does to help you level up. Be sure to visit us at MedMan.com.

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