Making the Most of Practice Financial Data

Adornments – 2021

Sierra Nevada, NV

Pearls Amidst Numbers

A key report necessary for financial overview of your practice is your income statement which reflects its degree of profit or loss.

Typical financial software produces an income statement that is an overall financial analysis over a specified period of time. It includes revenue, expenses, net income (loss) and other data. This report is typically used by a business owner to monitor net income or loss. It also used by your accountant to provide various services, primarily the preparation of the business tax return.

If you are a solo practitioner and provide a single type of service, this type of report is usually sufficient for you to determine the financial status of your practice. 

This however, is usually the exception.

The Benefits of Profit Center Reporting

It is a common scenario in a solo or group practice, that the physician(s) as well as other non-physician professional staff provide a variety of services that generate revenue. There may also be products that are sold that provide additional revenue. For this reason, a general income statement does not provide sufficient information to determine the degree to which various services or products are profitable. In order to get this information, it is necessary to conceptualize and clearly define these different sources of revenue which may be referred to as "profit centers.”

Financial Statements by Profit Center: A Key Management tool

This type of report provides considerably more data about the various sources of income and is the basis for informed management decisions. It takes into account the revenue and actual cost of providing specific services by any professionals as well as the sale of products. This requires that services and products be categorized in the same manner with respect to revenue and cost.

Categories

In order to do so, it is important to recognize that the services represented by each profit center do not occur in a vacuum. That is, there are various elements that represent different types of costs that must be determined in order to accurately assess the cost of providing a service or product. This also allows for updating pricing as may be warranted. Examples of elements that contribute to costs, are direct and indirect overhead costs, personnel, equipment, supplies and possibly others.

During the course of your practice, this information can be updated on a regular basis so that net revenue by each profit center can be monitored accurately to inform business  decisions.

Useful Data, Informed Decisions

These are a few example of how you can use income statement reporting by profit centers:

• Ensure and optimize profitability of each center
• Adjust costs and/or fees
• Monitor the growth of your practice
• Establish and update goals for growth
• Determine wether adjustments of personnel, physical space or equipment may be necessary to accomplish projected goals for growth

While these are some important examples of the usefulness of profit center financial statements, there are other very beneficial ones.

Valuation

When the time comes that you begin to prepare to transition from your practice, this information will also be invaluable. When combined with your business plan, you will note how it provides very useful information that supports and informs how you have progressed over the years. In addition, it will provide the basis for creating projections for future growth. This information is extremely valuable for purposes of creating a valuation of your practice in preparation for an anticipated sale to another physician or a financial institution.

In Conclusion: Real Readiness to Sell

The data within this type of income statement provide a historical record that is very useful to you and to a professional who undertakes a valuation of your practice. It will more accurately inform as to its historical value and as importantly, the basis and  potential for future growth. It will also guide your perspective as you engage in negotiations with a prospective buyer. This is simply not available from a general income statement that has important but limited usefulness as a management tool.

From a buyer’s perspective, this type of reporting provides much more valuable insights into the sources and reasons why your practice has demonstrable value. It informs a potential buyer as to whether or not a financial investment is warranted. The organization and application of this data over time will reflect favorably upon you and your practice. Beyond a rational analysis of data it is also likely to support the emotional elements of decision-making by a prospective buyer. 

These considerations will accrue to your mutual benefit.

PS: Would you like to learn more about how to transition from your practice? I would like to help you. I provide practice transaction services that are tailored to your specific needs. Click here to request an introductory conversation.

If you would like to learn about another way that I can guide you, check    out this brief video that describes my unique online course: 

 The Practice Transition Course for Physicians. _TM     

Setting with Splendor – 2005

Idaho