There are two main financial statements involved in every Practice, an income statement and a balance sheet. Both statements paint a completely different picture and understanding the basics of each is important when you are evaluating past performance and planning for future performance.

Income statements

For medical practices that generate them regularly, P&L statements provide important monthly, quarterly and annual financial data that you and your leadership team should analyze. This statement covers a period of time and details important information such as revenue, expenses and net income or loss. This statement, when generated comparatively, can match up one period against a previous period. It can help you identify areas where you have succeeded as well as areas to improve. However, it is important to note that not every period is the same. Does your practice have any time periods of higher services provided? Did you incur out of the ordinary expenditures that will not repeat? These are items that are pivotal to take into consideration when comparing one period against another and planning for the future. Many Practitioners may just look at the bottom line (net income or loss) without diving into the analytics of all line items. Digging into the whys for the numbers presented is what will lead you into the solutions for planning the future.

Balance sheets

Balance sheets broadly address three components: assets, liabilities and shareholder equity.  Let’s take a closer look at each:

Assets
Often, balance sheets list assets from top to bottom in order of how easily they can be converted into cash (liquidity). They are usually split into two categories: current assets (convertible to cash in one year or less) and noncurrent or long-term assets (convertible to cash in more than a year). Assets can include cash, investments, accounts receivable, fixed assets, prepaid expenses and many more.

Liabilities
Liabilities include any money your practice owes to vendors, as well as rent, utilities and salaries. Current liabilities, like current assets, are due within one year, while long-term liabilities are due after a year or more. This include accounts payable, accrued expenses and debt.

Shareholder Equity
This is defined as the residual ownership interest in a practice after deducting its liabilities. In fact, the aforementioned equation for assets can be stated as:

equity = assets – liabilities.

A balance sheet is presented at a point in time. As such, many components of this statement may change dramatically based on the date the balance sheet is generated. In addition, many ratios can be computed to illustrate financial metrics of your business. AR turn over and AP turnover are two examples of this.

Related Read: Are You Overlooking the Implicit Costs of Your Medical Practice?

Keep the business profitable

Your medical practice is a business, and to run a successful business you need to understand your financial position. By regularly reviewing your P&L and balance sheet, you can make ongoing course corrections as necessary to ensure your medical practice stays profitable over the long term.

If  you would like more information, contact Kevin Omahen at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Health Care Group.