Over the next several posts, we’re going to go through techniques for analyzing your financial statements along with some preparation tips to enable you to make the best decisions for your practice. Please note that as we go through this information, we are not discussing reporting for tax purposes (an entire industry and blog unto itself), nor are we planning to discuss the rules of Generally Accepted Accounting Principles as it pertains to your financials. That is a discussion for you and your accountant. Here, we are focused on analyzing your financial information to make decisions about the operating needs and opportunities for your orthodontic practice and dental practice. We’re also focused on the profit and loss statement (income statement) and not other financial statements. At some point, we will get into those other statements as well.
When performing an analysis, here are some basic tips/techniques:
Simplify
When I receive financial statements from practices, expenses are broken into 40-50 different categories. For example, components of payroll may be broken up as follows:
FUTA Tax
SUTA Tax
Salaries, business staff
Salaries, clinical staff
OASDI tax
SSI tax
And so forth. All of those categories may prove very useful for preparing financial statements and ensuring accuracy. We’re not debating that point. But for analysis purposes, that’s a lot to track and the amounts tend to be so granular that doing any effective analysis may lead to some false conclusions. In most, if not all practices, you can consolidate your results into the following categories:
Revenue (less refunds)
Associate doctor expense
Employee costs (including salaries, taxes, insurance premiums, retirement plan expenses, etc.)
Marketing/advertising
Rent
Clinical supplies
Lab expense
Other operating costs (all of your other day-to-day costs like shipping, telecommunications, utilities, etc.)
Simply use a spreadsheet to enter your detailed P&L information into these line items. Take revenue and subtract the expense categories to arrive at operating profit. Note that we did not include compensation for doctors or debt service on equipment, leaseholds, practice purchase, etc. That decision relates to what you do with operating profit and not necessarily to the day-to-day operations of the practice. As such, we generally exclude those amounts to get a cleaner analysis of the daily operations of the practice. Also, some practices prefer to include associate doctor cost in employee costs if it is not too large a cost.
As you categorize, make sure you are consistent:
Let’s take the cost of shipping for your clinical supplies. You may decide to include the cost in clinical supplies or in other operating costs. Whatever you decide, make sure you treat every clinical shipping cost the same way every single time. That way, when you get into analysis and comparisons, you will know exactly what is in that account and will be comparing apples to apples in each period.
Select a useful time period
We’ve alluded to this in an earlier post, but if you only review data one month at a time, results may fluctuate so much that you can’t really effectively analyze the data. For example, let’s say that you had to be closed for an extra few days in a month due to severe weather. If you focus on that one month, you may conclude that the practice is struggling when that month is the exception, not the norm. While monthly review is important to identify obvious errors, we recommend looking at statements on a quarterly basis when analyzing. That tends to smooth out monthly fluctuations and give you a picture of the overriding trends in your practice.
So, given the tips provided above, here’s a sample of what an income statement subject to analysis might look like. We'll take this sample into the next few posts as we break down numbers and do some easy, yet effective analysis.
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