Understanding and working with key financial information

As you get your new practice up and running, stop periodically and make sure you know key financial information. You're probably thinking, "Who has time?" But keeping an eye on these key numbers can mean the success (or failure) of your new practice.

What we are talking about here is benchmarking, which is comparing your financial information to specific benchmarks. Benchmarking pairs the "How are we doing?" question, with the question, "Compared to what?"

Benchmarks tell you how you're doing compared to:

• Your projections of how well you think you should be doing;
• Your practice performance during the same period of time in the past (month, quarter, year);
• Specific commonly accepted ratios; and
• Other similar practices.

You find and review these benchmarks by looking at two important documents: Your practice balance sheet and cash-flow worksheets.

BALANCE SHEET

Your balance sheet provides a snapshot of your business at a specific date, showing assets (things of value owned by the practice) and liabilities (amounts owed by the practice). The difference between assets and liabilities is the amount of your equity (ownership) in the practice.

Within the balance sheet, two benchmarking ratios are key:

• Assets compared to liabilities. You should have twice as much in assets (particularly cash and accounts receivable) as you have in liabilities, in case you have to pay off liabilities unexpectedly.

• Debt compared to equity. You should also have twice as much equity as debt. Businesses that have lots of debt are considered riskier than those with little debt.

As you can see from the brief discussion of the balance sheet, checking these ratios periodically helps determine your financial position and helps you make financial decisions, like paying off payables as quickly as possible and not taking on new debt.

CASH FLOW

The second important benchmarking tool is your cash-flow analysis. Think of a cash-flow spreadsheet like a representation of your practice checking account. The income must exceed the outgo, or you will be overdrawn. You may have to reduce some of your fixed expenses (those which you must pay every month, even if you have no patients), or start taking credit cards, or work harder on collecting receivables.

Note: We are talking about cash, not profits. Profits are a tax concept that comes into reality only at tax time. Cash is a real concept that affects your business every single day. Don't confuse cash with profits, or collections with sales.

The point of this discussion is that you must know your financial position, work at finding ways to lower debt, and keep a positive cash flow. Easier said than done, we know. Certainly, you should ask for assistance from your CPA, but your own understanding of these critical benchmarking numbers will be your best weapon in fighting the battle to stay in business.