MDNews - San Antonio

+++++++++++++++++++++ + + +++++++++++++++++++++ ACCOUNTING +++ +++ Are Your Practice's Financial Statements Useful to You? M By Jim Rice, CPA ANY PHYSICIANS RECEIVE periodic financial statements from their accountants but do not fully understand them. Often, the financial statement is provided to the doctor after too much time has passed since the activity reflected in the statement, and it is therefore not as meaningful. Other times, the doctor perceives errors in the financial state- ment and dismisses its usefulness. These perceptions are often incorrect and are the result of a failure to properly advise the doctors on how to read the financial statements. All of this makes for doctors 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 statement. However, another financial statement called the statement of cash flows contains very valuable information, yet it is routinely not prepared. We will discuss the state- ment of cash flows later. Most medical practices keep their books on a cash basis, which basically reports cash in and cash out only. Whereas cash is king, the doctor should also be advised on the standing of the current patient receivables balance compared to that of the same period for the prior year. The physician should also be counseled on the aging of receivables, such as 30-day- old receivables, 60-day-old receivables, etc. But he or she should keep in mind how the practice's patient receivables have changed between the prior and current periods, as a decline in receivables could mean a problem is brewing. Balance Sheet The balance sheet provides data as of a set day and time, say at midnight of the date listed. Equipment is usually listed at its purchase price, then reduced 12 | San Antonio MD NEWS ■ MDNEWS.COM for depreciation taken over the years up to that date. Liabilities are reported at their payoff amounts as of the same date. Note, though, that most liabilities on the balance sheet are only for loans taken for the purchase of equipment, vehicles, etc., so that regular accounts payable, such as rent, supplies and taxes, are not listed. If the practice is not paying these recurring liabilities in a timely manner, 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. All financial statements prepared for doctors should be comparative with the prior corresponding period. So if the doctor is looking at December 31, 2011, financial statements, those statements should have a column next the 2011 numbers with the December 31, 2010, numbers. Comparing the current period's figures with those of the prior period is extremely helpful in understanding trends, checking for unusual variances in collections and expenses, comparing actual figures with budget projections and benchmarking against industry standards. Budgeting is a very helpful tool for seeing if goals set at the beginning of the year are being met. Benchmarking by using common industry standards for various expense categories to see how the practice compares with other practices is also important in understanding how well or poorly a practice is doing. The Medical Group Management Association and Medical Economics are two sources to consider for benchmarking data. P&L Statement The profit and loss statement should clearly spell out the sources of patient col- lections and the various types of expenses, and it should include comparative informa- tion from the prior corresponding period of time. This statement should also include budgeted numbers and benchmark data for the reasons discussed above. In addition, the profit and loss statement should provide the doctor with a clear understanding of the financial results for his or her hard work. This is done by isolating the com- pensation to the doctor. This compensation is from salary, other types of payment 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 allow- ances, etc. Isolating this compensation information allows the doctor to clearly see the "bottom line" of what is truly earned from the patient collections. Statement of Cash Flows Finally, there is the statement of cash flows, which, unfortunately, accountants rarely prepare for the doctor. So often, doctors find themselves working harder and making less money. This statement is designed to clearly show the physician where cash was coming from and where cash was used for a stated period of time. For example, the year-end statement of cash flows would report the cash sources and cash uses for the 12 months of that year. This statement is difficult to under- stand at first glance, so the accountant must sit with the physician to explain the format and accounting terms used. One of the main points to be made here is that doctors need to get more out of the financial statements prepared for them. Their accountants need to take a stronger role in making sure the doctors have the financial information they need to manage their practices. Jim Rice, CPA, is a shareholder at Sol Schwartz & Associates, P.C. He has 32 years of experience in public accounting. In addition to providing business consulta- tion, 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 indi- viduals. Contact Rice at jprice@ssacpa.com or (210) 384-8000 Ext. 112. ■

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