Understanding Your Financial Statements

By Jim Rice, CPA, and Leslie Buoy
Tuesday, February 26, 2019

Many physicians receive periodic financial statements from their accountants, but do not fully understand those financial statements.

Many times the financial statements are provided to the doctor after too much time has passed and are therefore not as meaningful. Other times, the doctor perceives errors in the financial statements and dismisses their usefulness. These perceptions are often incorrect and the result of the doctor not being properly advised about how to read the financial statements. All of this makes for physicians not getting the maximum benefit from having financial statements prepared for them.

The two most often prepared financial statements are the balance sheet and profit and loss (P/L) statement. There is, however, another financial statement called the statement of cash flows that has very valuable information, yet is routinely not prepared. We will talk about the statement of cash flows later.

Most medical practices keep their books on a cash basis, which reports cash in and cash out only. Whereas cash is king, the doctor should also be advised about the current patient receivables balance as compared to the same period for the prior year. The doctor should also be advised about the aging of the receivables, such as 30-day-old receivables, 60 days, etc. Keep in mind how the practice’s patient receivables have changed from the prior period to the current period, as a decline in receivables could mean a problem is brewing.

The balance sheet is as of a set day, say at midnight of the date listed. So the cash balance is exactly that amount on that date. Equipment is usually listed at its purchase price and then reduced for depreciation taken over the years up to that date. Liabilities are reported at their payoff amounts as of the same date. Note though, most liabilities on the balance sheet are only for lines of credit or loans taken for the purchase of equipment, vehicles, etc. Regular unpaid accounts payable, like rent, supplies and taxes, are not listed. If the practice is not paying these monthly-type liabilities timely, those liabilities can be an indication of financial problems that are not noted on a cash basis balance sheet.

What is left after subtracting the liabilities from the assets is the practice’s equity. The practice’s equity indicates the general financial well-being. However, keep in mind that the balances in the patient receivables and accounts payable must be considered in any assessment of financial well-being of a cash basis prepared balance sheet.

All financial statements prepared for physicians should be comparative with the prior period. So if the doctor is looking at Dec. 31, 2018, financial statements, those statements should have a column next the 2018 numbers with the Dec. 31, 2017, numbers. Comparing the current period with the prior period numbers is extremely helpful in understanding trends, checking unusual variances in collections and expenses, comparing to budgeted numbers and for benchmarking against industry standards.

Budgeting is a very helpful tool to see if goals set at the beginning of the year are being met. Budgeted numbers typically reflect what the practice would like to achieve for the period in terms of patient revenue collections and limits on certain expense categories, such as salaries or practice overhead. Benchmarking by using common industry standards for various expense categories to see how the practice compares to other practices is also important in understanding how well or poorly a practice is doing. Medical Group Management Association, National Society of Certified Healthcare Business Consultants and Medical Economics are sources to consider for benchmarking data.

The P/L statement should clearly spell out the sources of patient collections, the various type of expenses and be comparative with the prior period of time. This statement should also have budgeted numbers and benchmark data for the reasons discussed above. In addition, the P/L statement should provide the doctor with a clear understanding of the financial results for the doctor’s hard work. This is done by isolating the compensation to the doctor. This compensation is from salary, other types of compensation, or cash withdrawals given and fringe benefits, such as health insurance, retirement plan contributions for the doctor, payroll taxes paid on behalf of the doctor, vehicle allowances, etc. Isolating this compensation information allows the doctor to clearly see the “bottom line” of what is truly earned from the patient collections. If the P/L statement was prepared on the accrual basis, the estimated collectible portion of outstanding patient receivables would be included as income, and the unpaid expenses incurred up to the date of the P/L statement would be included as expenses.

Finally, there is the statement of cash flows that unfortunately is rarely prepared for the doctor. This statement is designed to show the money coming into the practice by category (revenue, loans, sale of equipment, capital invested by the owners) and the money going out of the practice by category (salaries, rent, supplies, payback of loans, purchase of equipment) for the same defined period of time as that of the income statement. So often physicians find themselves working harder and making less money. The statement of cash flow helps explain where the cash went. This statement is difficult to understand at first glance so the accountant must sit with the doctor to explain the format and accounting terms used.

One of the main points to be made here is that physicians need to get more out of the financial statements prepared for them. Their accountants need to take a stronger role in making sure the physicians have the financial information they need to manage their practices.

Jim Rice, CPA, is a shareholder at Sol Schwartz & Associates PC. He has 39 years of experience in public accounting. In addition to providing business consultation, financial planning and various other accounting services, Rice specializes in income tax planning and consultation. He works with a high concentration of physician practices and high net worth individuals. Contact Rice at jprice@ssacpa.com or 210-384-8000, ext. 112.

Leslie Buoy is currently a Senior Tax Associate with Sol Schwartz & Associates PC. Buoy enjoys helping individuals, corporations, partnerships and trusts with tax compliance and planning issues. In addition, she helps clients with software training, bookkeeping consulting and various other accounting services. She has 18 years of experience in public accounting. You can contact Buoy via email at lmb@ssacpa.com or 210-384-8000, ext. 120.