You’ve done it. You successfully graduated medical school, finished your residency, passed your board exams – and now have your own practice. So, what now? Part of running your own practice includes some managerial roles such as managing staff, hiring the correct consultants and building a team of trusted advisors. Reviewing your practice’s financial information is not something you may have come across during medical school, and it’s not something that can easily be self-taught.
Getting Familiar With Your Financial Statements
The two most basic financial statements are the balance sheet and income statement. In medical practice accounting, most practices use the cash-basis method of accounting. Under the cash-basis method of accounting, revenue is not recognized until it is received, and expenses are not recognized until they are paid.
The balance sheet will present the assets, liabilities and owners’ equity for a specific date. Assets are the economic resources owned by the practice, including cash, equipment, furniture and fixtures, vehicles, leasehold improvements and security deposits. Liabilities are the debts or other obligations of the practice. Debts are usually classified as short-term or long-term. Short-term liabilities are those due and payable within one year. Owners’ Equity represents the residual financial interest in a business, think of this as the net worth of the business. Owner’s Equity will fluctuate based on three factors: performance of the practice (income or loss), contributions (monies or assets brought into the business) and draws (distribution of profits).
The income statement reports both revenues and expenditures for a specified reporting period, this could be monthly, quarterly or annually. Revenues can be comprised of patient services collected and sales of tangible goods. Expenses are the operating expenses related to running the practice and providing services. Other Income or Other Expenses are those items that do not stem from the ordinary course of business. An example would be an insurance payout from a business interruption policy. Another example would be interest income received from a business savings account.
Now that you know the two basic financial statements for medical practice accounting, how do you review these numbers to make sure they are accurate to the activities of your practice?
- You want to compare current periods to prior periods.
- Most fixed expenses will be the same month over month. For example, rent, utilities, insurance and salaries. You want to look at any large or unusual fluctuations month over month.
- Any unusual increase or decrease in expenses should be investigated. It could be duplicate payments to a vendor or missed payments to a vendor. There could be misuse of supplies. There might be a capital expenditure that may be coded to the income statement instead of the balance sheet.
Most businesses look at profitability as the revenues collected less the expenditures made during a period. Some of these expenditures could be operating expenses, which would go on the income statement, while others could be capital expenses that are reported on the balance sheet. So, while it may look like the practice generated some net income, that doesn’t necessary mean that you will see that profit in the bank account. Another item that most people forget to consider in healthcare accounting is the repayments of loans. This cash outflow is reflected on the balance sheet therefore it does not impact your income statement and bottom line, but it is money coming out of the business.
Other reports that must be reviewed on a periodic basis are the accounts receivable aging and accounts payable aging. Knowing that submitted claims are being paid and collected in a timely fashion is vital to your medical practice profitability. While reviewing your accounts payable, you should see if it’s accurate and that the bills listed are still outstanding and not duplicates while ensuring that you are taking advantage of any net term discounts.
Understanding your medical practice’s financial statements is critical to evaluating the performance of your medical practice. Reading and analyzing financial statements may not have been something you anticipated to be in the job description, but obtaining these skills will lead to better decision-making for your practice. By building a team of trusted advisors that can help navigate you on the ins and outs of financial reporting, you are one step closer on your path to success.
Author: Ana Costa | [email protected]
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