Your Practice's Monthly Health Checkup
/A couple weeks ago I talked about how a monthly (or at least quarterly) review of your financial statements is the equivalent of your practice having a “medical history” and why that is so important! You can read that article HERE.
Today I’ll be talking about how to review those financial statements every month, which is equivalent to performing a health check up on your practice. Reviewing those statements every month can be intimidating when you don’t know what you’re looking for. Do you find yourself staring at the sheet full of numbers wanting to yell “it’s like it’s trying to speak to me, I know it!”? If you answered yes, then don’t worry because you are not alone. Most veterinarians answer yes to that question. So to simplify things a bit, I’ve put together a list highlighting the areas in each financial statement that you want to pay close attention to every month.
When you first review your balance sheet, start by checking your cash. Always remember the amount of cash you have per period. Check to see how much cash has gone up or down in the past several months. Always know what your average cash flow (aka cash burn rate) is. You can figure out this number by calculating how much cash went up or down over a period of months and then dividing that by the number of months in that period. Your monthly cash number should be around the same amount as your quarterly average, six-month average and annual average. If these numbers are not in the same ballpark, that means something is changing in your practice. Could be a good change or a bad change. To answer that you will have to dig a little deeper. If by any chance the average numbers are negative then your next step is to find out how many months of cash you have left. You will figure this out by dividing your cash balance by your average monthly burn rate.
Next step on the Balance Sheet is to check the Accounts Receivables. Is that number higher than usual? Remember, this is potential cash for your practice. And as they say, cash is king! If this number is too high, check your Aged Receivables report to see how many of these accounts are outstanding and by how long.
Now move on to Liabilities. Check out your Accounts Payable balance and compare the number to your Aged Payables Report to make sure the number is accurate. Take the time to also check how old the outstanding bills are. You don’t want to lose good standing with any of your vendors by leaving bills way overdue.
Next check your Payroll Tax liabilities to make sure they aren’t increasing dramatically. If they are, it could mean that your payroll taxes aren’t being paid on time.
When analyzing the P&L Statement, it’s a good idea to lay out a few periods next to each other for comparison purposes. Compare the key line items, like revenue, gross margin, operating costs and operating income, and see how the numbers are doing over time. Ideally, revenues and gross numbers should grow faster than operating costs, and operating income would be growing faster than both of them.
Check out your Total Revenue to see how much sales your practice generated in that month of quarter. Compare it to previous months or quarters. Has the number dropped or increased dramatically? If so, dig deeper to find out why and make changes accordingly.
Examine your Net Income. Did you make any money during that period of time? If it’s lower than expected, check out your Cost of Sales. Is the number the same as previous months or has it increased? If it has increased, that could explain why your Net Income is lower than usual. If it is the same as previous months, than you need to investigate further. Check your Operating Expenses or any other accounts that can fluctuate with the volume of sales.
First line you want to look at is the cash flow from operations. This number shows how much cash the practice is generating from operations. If the figure is negative, that could mean there are some problems within your practice that require changes. Ideally, the amount of cash flow from operations will consistently be greater than the practice’s net income. This is because the net income takes into account revenues and expenses where money has yet to be exchanged. However, with cash flow, you either have the money in the bank or you don’t.
Compare the cash flow for that particular period to the cash shown on the Balance Sheet for that same period. If they do not match, then it is very likely that an error has occurred.
By keeping an eye on these numbers, you will start each month knowing exactly how your practice is doing financially and what you need to do to increase your profits and grow your practice. If you are about to make some major financial changes in your practice or are just looking for a deeper understanding of your financial statements, arrange to sit down with your bookkeeper or CPA at least once a quarter for a thorough explanation.
Interested in learning more? Send me an email at rbailey@veterinarybookkeepingsolutions.com. Look forward to hearing from you!