Creating a Financial Forecast
Forecasting the future is difficult, but you don’t need a psychic to figure out what business will look like for your physical therapy practice. All you need is your previous financial statements, a general understanding of running a PT business, and some timely research that can guide your predictions.
In this article, you’ll learn how to create a financial forecast for your PT practice so you can accomplish goals like receiving investor funding, planning a budget, starting a practice from scratch, or even expanding your operation.
Gather Your Records
The first step of any financial forecasting for your practice starts with proper bookkeeping. If you don’t have access to the prior years’ financial statements, you’ll need to collect and create the balance sheets, cash flow statements, and income statements using the following:
- Debt Collections
- Business Expenses
- Vendor Accounts
These financial statements will look different depending on your physical therapy practice’s specialization, but the usage is the same. They help PTs understand what’s going in and coming out of their practice’s pocketbook. You can also leverage these documents to invest in new assets, create a budget, understand profitability, secure a loan, and make taxes easier.
Luckily, most accounting software (or bookkeepers) will organize these for you, provided they exist. There’s no reason to worry if they don’t; there are still ways you can compile a financial forecast without the use of historical data.
Decide on the Method of Forecasting
Most financial forecasting relies on a blend of historical financial data and research-based conclusions. The combination you choose for your practice depends on whether you have historical data, any major shifts in your business, and the outlook for physical therapy.
Grabbing data from previous years is one of the most reliable ways to create a financial forecast for your practice. Instead of relying on the “what ifs,” knowing what your practice historically produces can help you predict future numbers. Your previous balance sheets, cash flow statements, and income statements can help you spot growth trends over the years. The more data you have, the more accurate your predictions will be.
For example, if you’ve grown at an average of 5% annually over the past ten years, all else equal, you should forecast another 5% growth for the next few years. Using historical data is efficient when you’re forecasting for moderate growth.
However, macro and micro factors that affect the ebbs and flows of business tend to skew this data, which is where research-based conclusions can provide a better picture of future business.
Understanding the broader trends in physical therapy, your personal business decisions, and how competitors have fared over time contributes to drawing research-based conclusions. These research assignments can be as simple as using known information or detailed as building research reports on various topics. These complex reports are sometimes prepared by consultants or professional researchers—which can prove costly.
However, mixing your historical data with this type of forecasting is essential when you’re predicting larger than average growth, expanding your operations, or expecting significant shifts in the physical therapy industry. It’s also the only way you can forecast your financials when historical data isn’t available.
Some ideas that require research beyond historical data include:
- Accounting for a boost in patients due to massive surgical backlogs from the pandemic—leading to an influx of physical therapy treatment
- Expansion of your physical therapy operation into a new office building
- Offering a new type of physical therapy service
- Examining your competitors’ success in a specific geographical area to forecast how well your practice will perform
Create Pro Forma Statements
Pro forma statements are similar to regular financial statements, except they’re based on hypothetical income and losses. Try to include a best, average, and worst-case scenario to ensure you’re setting proper expectations.
Using historical and research-based data, you can create pro forma statements that can be helpful to:
• Gain potential funding from investors
If you’re trying to secure funding, pro forma statements can show the credibility of the concept to potential investors.
• Expand your business
You can predict the payoff of expanding your business.
• Forecast your financials
You can use these forecasts to plan a budget and run a more profitable PT practice.
Pro Forma Income Statement
Pro forma income statements (also referred to as profit and loss statements) are the bread and butter of projections. You can use these to set profitability goals and predict how many patients you’ll need to see to get there.
Here are the steps you’ll need to take when creating a pro forma income statement:
- Set your income goal over a fixed period.
- Determine how many patients you’ll need each month to reach your income goal.
- Consider what you’ll need to improve to hit your income target. This could be increased marketing efforts, relationship building with local physicians, and community involvement.
- Calculate and deduct all your operating expenses
- Build the pro forma income statement
Pro Forma Cash Flow Statement
Regular cash flow statements pull information from the income statement to determine if your business has enough cash flow to operate. Pro forma cash flow statements are similar, but you’ll use the pro forma income statement as your guide. Cash flow statements will help you figure out if your projected net cash flow is sufficient to keep the practice in operation. If not, you’ll need to make plans to borrow funds (especially during expansionary periods).
Pro Forma Balance Sheet
Creating a hypothetical balance sheet is the last statement you’ll need. The balance sheet is created using both the pro forma income and cash flow statements. The idea is to see a snapshot of how your PT practice grows over time. By comparing your pro forma balance sheet to previous balance sheets, you’ll be able to draw conclusions and ensure your practice is headed in the right financial direction.
Compare as You Go
After you’ve created all these pro forma statements, forecasting often requires active management each month, quarter and year. You’ll need to compare your forecasts to the actual numbers. This comparison will help you draw conclusions, adjust your future estimates for accuracy, and get in front of potential “practice-stopping” problems—like not having enough cash for necessary expenses.
The Bottom Line
You can use historical data and research-based conclusions to build a financial forecast which will help you estimate the profit, cash flow and expenses that might occur while running your physical therapy practice. Proper bookkeeping and research will play a vital role in the accuracy of these predictions. Still, you’ll never know the accuracy of these pro forma statements until you compare the actual amounts to your forecasts—adjusting for discrepancies.
If you’d like to take control of your practice management and beef up your revenue expectations for your next financial forecast, try a free demo of MWTherapy’s all-in-one software. You’ll have access to a complete set of tools that make day-to-day practice management a breeze so you can focus on what matters most.