Your balance sheet: what can it tell you?

While the income statements that we have been dissecting over the last few posts generally provide the best source of information for us to financially analyze a practice, the balance sheet represents another portion of the financial statement package that provides valuable information.  

First, to put us ahead of most of the media – who seem to refer to any financial statement as a balance sheet – let’s define a balance sheet.  A balance sheet is representation of a practice’s financial position as of a given point in time.  So, if we were to take a snapshot of a practice as of, say, December 31, 2013, we would look at the items of value (assets), financial obligations (liabilities) and built-up worth (equity) in the practice at that point in time.

This is not a financial accounting blog so I will not get into things like assets = liabilities + owners’ equity or inventory valuation methodologies.  Any popular financial accounting package will be able to generate a balance sheet for you.  Once that happens, the steps to analysis are very similar to those for an income statement:

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Simplify

As with the income statement discussion, analysis is easier and usually more meaningful if you consolidate accounts down into a select few.  How you consolidate will probably vary depending on the practice setup and legal structure of the entity, but here are some that we’ve found to be useful:

Cash 

Inventory

Fixed assets (before accumulated depreciation)

Accounts payable

Other payables (accrued payroll, accrued payroll taxes, etc.)

Notes payable (along with any interest accrued)

You may be in a position where you feel that inventory in your practice is minimal and that taking a count of inventory each quarter has more cost than benefit.  In those cases, there are ways to estimate inventory based on purchases during interim periods or you may elect to ignore it altogether.  Still, we would encourage you to take at least an annual inventory of your supplies just to get a feel for what you have on hand and whether or not you should make changes to your purchasing processes.

Analyze trends

When it comes to balance sheets, trends from one quarter to the next can prove to be very helpful.  Where income statements tend to be heavily impacted by seasonality, the impact is less severe when you examine your balance sheet, especially if you have a mature, consistent practice.

Cash is very clearly an important, if not the most important, line item for any financial statement.  As cash fluctuates from quarter to quarter, you need to be comfortable with the changes in that balance.  We always want to see that balance increasing, but even when increasing, is it growing as fast or faster than our expectations?  If your expectations are not met, some additional analysis is appropriate.  Preparing a statement of cash flow may be helpful, but perhaps not as useful as a review of the transactions on your bank statement (since most practices’ cash items tend to be for ongoing operating costs).

For accounts payable, you want to make sure that obligations are not growing faster than you had hoped.  As you practice grows, your bills for things like supplies and ongoing services will probably grow too.  Don’t let them grow so fast that your practice is buried in bills.

Growth in inventory may represent an over-ordering problem that needs to be contained.  By the same token, shrinking inventory may leave you unprepared for heavy volume patient days (the average corner store probably doesn’t have bands and brackets with your prescription).

Notes payable should, hopefully, be steadily declining as you make principal payments on whatever long term obligations you have.

In a standard practice, you generally shouldn’t see any changes to fixed assets that you haven’t approved or been notified about.  If you do, find out the source of the change and get that problem solved.  Because fixed assets tend to be larger dollar amount items, any expenditure there should be met with higher-than-normal scrutiny.

Again, the purpose of these statements is to give you the information you need to see what issues may exist in your practice and from there, they also help direct you on the best decision to rectify those issues.  Use them wisely.

Have any questions.  Want someone to review your balance sheets and provide actionable guidance with follow up free of charge (in most cases)?  Contact us.