Happy new year, and let me say it’s a privilege to join the Tip of the Week. As you close the books on 2017, most of you will be reviewing the past year’s financial results and finalizing plans for 2018. As you do, it’s a good time to make sure your financial statements are giving you a clear picture of what’s going on in your practices.
Remember, your Income Statement (also known as the Profit and Loss Statement, P&L for short), Balance Sheet, and Cash Flow Statement are for you. So make sure you can easily understand your financial statements. They are a tool to help you assess how your revenues, expenses, profits and cash flow are changing over time.
Based on the several thousand P&Ls I’ve reviewed with practice owners, here are three ways most practice P&Ls could be better:
1. Group your expenses into categories. Most Income Statements start with Revenues, followed by Cost of Goods and Gross Profit, and then have a cornucopia of expenses all bunched together before Net Income or Operating Income.
To make your P&L easier to read and analyze, I recommend you use the 7 Key Expense Areas developed by Dr. Jerry Hayes (disclosure: he’s my dad) or something similar. The 7 Key Expense Areas are: Cost of Goods, Non-OD Staff, Occupancy Costs, Equipment Costs, Marketing, General Overhead (a catchall for everything else), and Practice Net (all pay and benefits to all the ODs in the practice, plus Net Income and non-cash expenses like depreciation).
2. Separate your payroll between owners and employees. Owners often worry that their staff costs are high, but all they can see on the P&L is a payroll number that includes the owner, associate ODs and non-OD staff. When you break your payroll out on the P&L, be sure to include payroll taxes and benefits like health insurance in each bucket.
Typically, the salary and benefits breakouts in your accounting software will be for “Officer” (the owner(s)), Doctor (employed ODs), and Staff (non-OD employees).
3. Get your Gross Collected Revenue and Operating Income right. To accurately benchmark your practice and to have truly measurable goals, you need an accurate number at the top line of your P&L and the bottom line, which reflect accurately the revenues and profits of your practice. A couple of things I frequently recommend:
• Be sure to deduct sales tax and insurance adjustments from the top line of your revenue.
• Rebates from your alliance or buying group should be booked against your cost of goods. I would do the same if you’re a member of a co-op laboratory, or put that dividend in Other Income.
• Income from working outside of the practice should be in “Other Income and Expenses”, found below your Ordinary Income (also called Operating Income). Do the same for incentives like the Meaningful Use incentive from several years ago.
Bonus: Don’t forget that your P&L typically does not show principal payments on outstanding loans, only interest. Even once you’ve tightened up the revenue and profit portions of your P&L, remember that the income statement only shows you the cost of the money you borrowed – the interest – if you have loans you are still paying off.
Principal payments on debt are tracked on your Balance Sheet and Cash Flow Statement. If you’re wondering why your profits don’t match up with the actual money you pay yourself, debt service is one of the first places to look.
If you find it hard to understand your financial statements – particularly your income statement – try making some of these changes to simplify and clarify what you’re looking at. Having a good handle on your revenues and profits won’t magically help your practice grow its revenues and profits. Keeping a good handle on your finances will help you make better decisions about current and future spending and maximize your income from your practice.
Nathan Hayes is the Practice Finance Consultant for IDOC. He is a 10-year veteran of the eyecare industry, working at HMI Buying Group and Red Tray, Prima Eye Group from its inception and now IDOC. In his current role, Nathan helps OD practice owners manage their overhead, grow practice revenues and profits, and maximize their personal income, free time, and professional satisfaction.