Resource Centers:(News, information, and tools to support your practice)
February 2010
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Importance of analyzing financial performance
As an effective and profitable business owner, you need to regularly schedule time to analyze your business’ performance.
Business owners often fall into the trap of thinking they know the state of their financial affairs as they become busier. The daily demands of running a successful business, however, leave them little time to devote toward this critically important management function.
How did all of this happen?
If you approach the end of the year with expenses out of control and underfunded tax liabilities, you may now be confronted with a cash shortage and forced to approach a bank for an operating loan; however, the worst time to face your bank is when you are in a cash crisis. “How did all of this happen?” you ask yourself.
Generally, there are some consistent issues that need regular attention, including:
• Inaccurate financial information. Many business owners make the mistake of not spending the time or hiring the expertise to manage their financial information. Without accurate, timely information, many business decisions run the risk of being made based on inaccurate information.
• How does this happen? One example is you assume the information being entered into your accounting software is correctly recorded. The person you hired had a lot of experience with your software and you assumed they were capable of entering the information correctly. Does this person really understand accounting?
• Have the entries for the month been reviewed by someone that understands accounting information? Maybe you, as the business owner, have that expertise, but are you reviewing everything? If you, like many, don’t have an understanding of accounting, you should hire someone who can supervise this process with minimal time spent and follow-up with you and your in-house accounting person.
• Maybe your accounting/tax preparation firm assists you with your bookkeeping functions. Do you review their work? While they most likely have the skills necessary in accounting, many times they may not understand your business as well as you.
You may find errors or ask questions that lead to identification of errors or other adjustments early on in the process by doing this review. Are your expenses properly recorded to the right account? They will welcome your oversight as they want to be as accurate as possible with your financial information.
• Are accounts being reconciled? Is it your practice to reconcile your bank statement, loan statements, and credit card statements
• Are personal expenses being paid out of the business? If they are, this should be a high priority to correct. It is important for you to establish a routine draw or payroll amount, and then keep business and personal activity separate.
You will never have an accurate picture of your business performance if you blend expenses. If you blend in personal expenses, it will also result in an unclear picture of your personal expenses.
Benefits of implementation
Once you implement the necessary oversight and monitoring of your financial information, you know it is an accurate reflection of your business’ performance. So now what benefits can you expect?
• You can budget accurately and effectively.
• You will be able to anticipate your cash flow needs and be ready when you have to make estimated tax payments.
• You will have credibility with third parties that rely upon your financial information, such as your bank, mortgage company, etc.
• You will be informed and able to speak intelligently as it relates to your business’ finances.
• You will be adequately informed and prepared when faced with critical financial decisions or choices.
Accurate information
With this accurate financial information, how do you begin to analyze the data into something meaningful for your business?
The first step is to begin to compare your information with previous years and with your peers. Make a comparison of revenue, total expenses, and profitability. Are there trends that need further exploration?
With a service business such as a chiropractic practice, your most important ratios are going to be your operating ratios. What are certain expenses categories as a percent of total revenues? You should measure your larger expense categories and determine if they are increasing or decreasing as a percent of revenues.
Labor, marketing, and rent/occupancy costs will generally be your larger expense categories. If your labor is increasing as a percent of revenues, it may indicate that you need to focus on staff productivity and training.
Start a file of meaningful financial information as you read articles, interact with your peers, or run across financial data that relates to your business. Ask your accounting/tax preparation firm if they have access to meaningful data. Your bank will often have resources that may give you insight into how your business compares to others in the same industry.
You will find the time you spend in analyzing your business to be one of the most important and profitable uses of your time. It will be the beginning of “working smarter, not harder” in your endeavor to create a successful practice.
Larry Jensen is, MBA, is the accounting manager for Hooper Cornell, P.L.L.C., a CPA firm located in Boise, Idaho, specializing in healthcare services. He can be reached at 208-344-2527, ljensen@hoopercornell.com, or through www.hoopercornell.com.
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