Every business owner understands that budgeting is a critical part of running a successful practice. While it might feel overwhelming at first, once you get the hang of it, the process can even become rewarding. A well-crafted budget isn’t just about balancing numbers; it’s about aligning your financial objectives with the core mission of your practice, managing resources effectively, and creating space for sustainable growth.
When you have a solid plan in place, you can concentrate on helping your clients while maintaining the financial health of your practice. Let’s look at five essential steps in creating a budget for your therapy practice.
1) Examine the Cost Structure
Every business incurs costs to generate revenues because these expenses shape the financial health of your practice by determining how much profit remains after covering expenses. Direct costs are directly tied to your therapy services and are crucial to your services. Without these costs, you can’t deliver a good service to clients.
Indirect costs, in contrast, cover operational essentials that aren’t directly connected to client care, like rent, utilities, or general office supplies. Because these categories can overlap, it’s crucial to understand how they interact so you can allocate resources wisely and avoid unnecessary overspending.
Costs also differ based on their behavior: variable or fixed. Variable costs, as the name suggests, change based on factors like the number of clients you see or materials used in sessions. Fixed costs stay the same or “fixed” regardless of your client load, but they become more noticeable if your revenues are low.
By understanding these cost dynamics, you can project your expenses with greater precision, laying the groundwork for a dependable budget that supports your practice during slow periods and positions you for future growth or strategic investments.
2) Understand How You Make Money
You need to understand where your revenue comes from and identify the key areas that bring money into your practice. You should look at revenue coming from multiple sources or streams in order to maximize your skill and expertise.
For example, group therapy sessions or workshops generate more revenue in less time, while offering digital products like self-help e-books or guided meditation downloads gives a steady stream of passive income. Diversification of revenues helps you generate multiple revenue streams, especially when revenues are low in certain areas.
One-on-one sessions might provide steady income but it’s just one client. Hosting a workshop, on the other hand, can help you generate more revenue based on audience size and also help you reach more potential clients.
By analyzing how each revenue stream contributes to your bottom line, you can dedicate more time and effort to areas with high returns while trying to fix areas with low returns.
3) Don’t Forget Big-Ticket Expenses
Capital expenditures or “big-ticket expenses” are significant purchases that require a substantial outflow of cash or incurrence of long-term debt. Unlike routine expenses, capital expenditures are non-routine, but they can significantly affect your operations, especially if you need to commit to monthly amortizations or installments.
Strategically including these expenses in your budget is essential for planning your cash flow because future repayments may be needed to pay off these expenses. By allocating resources toward these major investments ahead of time, you can avoid financial surprises and ensure you’re prepared to fund them without jeopardizing your day-to-day operations.
For example, let’s say that your sofa is quite old already and needs replacement. The price of the sofa that you want is quite significant. You can add the cost of the dental chair as a capital expenditure in next year’s budget. Pick a month where you intend to buy. Afterward, you can set aside a portion of your monthly income to go towards the funding of the new sofa.
4) Draft Your Budget
Drafting your budget is the time when you put things into paper. You can start by gathering essential data, such as last year’s income statement and balance sheet. Use a spreadsheet or a simple budgeting tool to outline sections for income and expense.
You don’t need to have a full-blown budget right away. Start small and do it by groups. You can start with revenues by estimating your monthly income from all services. Go to the smallest detail such as estimating how many hours you plan to accommodate patients on weekdays and weekends. After that, list all expenses and divide them into fixed costs like rent or insurance and variable costs like supplies needed in therapy sessions.
And finally, review your draft carefully, adjusting it to balance income and expenses so it aligns with your financial goals. By breaking the process into manageable steps, drafting a budget becomes a practical way to maintain control over your practice’s finances.
5) Approve and Enact Your Budget
For small therapy practices, you act as both a decision-maker and executor. You can begin by going through each section of income, expenses, savings, and capital expenditures to confirm that projections are accurate and align with your financial goals.
Compare your actual results to your budgeted amounts to spot differences, known as variances. When actual revenue exceeds what you planned, it’s a favorable variance, meaning you earned more than expected. Conversely, if revenue falls short of your budget, it’s an unfavorable variance.
The same principle applies to expenses. If your actual spending is higher than budgeted, it’s considered an unfavorable variance since you overspent. However, spending less than planned results in a favorable variance, as you managed to save compared to your projections. Understanding these variances helps you evaluate performance and adjust your budget effectively.
We recommend setting up a system for tracking spending and income against your plan by either using a spreadsheet or budgeting software. Don’t forget to schedule regular check-ins (e.g., monthly or quarterly) to evaluate the budget’s performance and take necessary actions. Treat the process as a living cycle rather than a one-time task. This approach ensures your budget is a practical tool that’ll guide you in resource management and long-term planning.
Want To Make Budgeting Easier?
Budgeting might feel daunting, but it’s essential for guiding your therapy practice toward success. Understanding the flow of money in and out of your practice gives you the clarity to make decisions that align with your goals.
At TL;DR Accounting, we simplify budgeting, accounting, and tax compliance for therapy practice owners. Our team helps you craft a budget tailored to your unique needs and long-term vision.
Ready to take charge? Schedule a discovery call today, and let’s create a financial plan that works for you.
