It’s a late Friday afternoon, and your staff has left for the weekend. Before you head home, you want to check on where you are at financially. Maybe you’ve been struggling with cash flow issues lately. Or maybe you want to make an investment in your practice but aren’t sure if you can afford it.
This quick breakdown of your statements can help you interpret the financial aspects of your business even when your financial advisor, bookkeeper or office manager isn’t around.
Your balance sheet is a snapshot of all your assets, liabilities and capital investment at a point in time. It is a measurement as of an exact date and includes the following information:
If your bookkeeper is up to date and reconciling your account, the cash accounts will show the cash balance in your accounts.
The next section should show the remaining tax basis of your furniture, equipment, technology and any purchased goodwill. If you are an S Corporation and have taken loans from your corporation, you could see a Stockholder loan in the assets section of your balance sheet which will have to be paid back with interest or declared as salary in the future.
You will generally see payroll taxes, your retirement contribution payable, credit card balances and your line of credit, equipment notes and other long-term liabilities. You might also see a Note Payable – Stockholder. If you have an S Corporation, this is an important figure as it is factored in when determining your tax basis in your stock.
If you are a sole proprietor or a single member LLC, you will see your draws taken during the year for personal items. There will also be an account for your personal estimated tax payments. If you have a C Corporation, the stock value listed will be important to you when you close down your corporation.
Finally, if you are an S Corporation, you need to look at your distributions and the Accumulated Adjustment Accounts. Both of these numbers are used in calculating your basis and whether you have taken excess distributions in the year triggering additional taxable income.
Look for warning signs.
If your equity is a negative number in the early stages of your practice, you may have taken the accelerated Section 179 depreciation which means the tax basis of your assets has been reduced while you still owe money on the equipment. This can actually be a smart tax planning technique. However, a small or even negative cash balance with large distributions could be an indicator that you have taken too much cash from the business.
Profit and Loss Statement
Your profit and loss statement shows the income and expenses for a period of time – generally, a month, quarter or year. Here are some things to consider as you review your profit and loss statement:
Are they increasing or decreasing? Did you raise your fees? Look at the potential impact of the increase.
Do you see large changes from the same time last year? Can you explain the differences?
Percent of Income
This is a great tool to help you benchmark against industry standards. Your medical supplies and office supplies should account for 5-6% and 1-2% of your expenses, respectively. Lab fees should account for 7-8%. Marketing may take up 3% to as much as 10-12% for start-up practices. Payroll and benefits should account for 28-32% depending on benefits while your facility may take up 8-11%.
Your bottom line number is an indicator of whether you will have increasing or decreasing taxes at possibly a 50% rate. Remember that depreciation on new assets purchased and employer retirement contributions are two items that you do not have to pay for prior to the year end.
Take a look at your net profit percentage before depreciation. If you are an S Corporation, this includes your salary plus the net bottom line.
Cash Flow Statement
Your cash flow statement traces the cash flowing through your operations over a period of time. It starts with your net income and then shows financing or investing activities to reconcile to the changes in your cash. This is where you will see how your cash flow is affected by borrowing money or paying back loans. While your profit and loss statement might show that you made good profits, this statement will show you how much of that profit went to pay equipment loans or went home with you in distributions or draws.