Create an annual budget
The budgeting process forces you to consider each line item in your company’s balance sheet and income statement. You can identify potential problems and address them before the year starts. Once the bullets start flying, you’ll be busy and distracted, and problems may not get solved as quickly.
Here’s an example:
Julie reviews the accounts receivable activity for the year, and she notes one insurance company that pays Lakeside 30 days later than other insurance carriers. That raises several questions:
- Procedures: Are the payments slower because Lakeside is submitting incorrect data? That’s a question for the billing department.
- Share of revenue: How much of Lakeside’s revenue is dependent on the late-paying insurance carrier? If the percentage is large, or if business through the insurance company is expected to grow, Lakeside has a cash management problem.
Assume that the billing department is submitting data correctly. Julie discusses the late payment issue with the insurance carrier and determines Lakeside cannot speed up cash collections. The firm must use the vendor to serve patients, and they’re stuck with the slow payments.
To manage cash flow, Lakeside negotiates a higher line of credit (LOC) with the bank. Julie can borrow from the LOC, if slow insurance reimbursements are affecting cash flow.
If Julie doesn’t think through the accounts receivable issue during the budget process, she’ll have to address it once the year begins. With so many daily distractions, she may not make an informed decision, and cash flow may suffer.
Make the commitment to create an annual budget. Fortunately, there are some great online tools that you can use to make the process easier. Paro explains that managers should also review the budget during the year, and decide if budget assumptions still hold true. If not, update your budget as needed.
As Julie addresses each task that must be performed, she needs to document the steps to complete each task.