Medical Practice Financial Statements 101
Reviewing your medical practice financial statements is likely something you didn't learn in medical school. However, understanding your practice's financial position is crucial for making sound business decisions as you grow.
Doctors who start their own practice must be well-versed in business and accounting concepts as well as the medical world. Knowing the role your financial statements play in your business and how to use them will empower you to assess the financial health of your practice and make wise financial decisions.
Three Financial Statement Types Explained
The three fundamental financial statements are the balance sheet, income statement, and cash flow statement. A professional in accounting for medical practices will typically prepare these statements for your practice each month.
Medical Practice Balance Sheets
The balance sheet presents a business's assets, current liabilities, and owner's equity:
A medical practice’s assets are the economic resources it owns. This includes current assets like cash plus accounts receivable, equipment, furniture, vehicles, and inventory.
Liabilities are the debts or other obligations the practice owes. These debts are typically classified as short- or long-term. The main difference between the two is that short-term liabilities are debts payable within one year. Short-term liabilities include expenses like accounts payable, wages, and retirement plan payables. Long-term liabilities are payable more than one year into the future and include bank loans, lease payments, mortgage payments, notes payable, and bonds payable.
Equity shows the owners' residual financial interest in the medical practice.
Importance of the Balance Sheet
Balance sheets help medical practices understand their working capital; in other words, if they have enough cash to cover the practice's short- and long-term obligations. It can also shape decision-making, for example, if the practice is in a financial position to invest in new equipment.
Medical Practice Income Statement
The income statement—or profit and loss statement—reports revenues and expenditures for any given reporting period:
Revenues in a medical practice will include income from patient services and any sales of tangible goods like medical devices or skincare products.
Expenses are any operating expenses connected with running your practice and providing medical services. These include wages, overheads, insurance, and purchasing or renting medical equipment.
Importance of the Income Statement
Income statements are important because they reflect your practice's ability to generate revenue and profit. Medical practices that create regular income statements receive financial data that the leadership must analyze. Regular analysis will allow you to see fluctuations in revenue, expenses, and profits.
Your medical practice’s accounting professional will also help you calculate important financial information like your practice's breakeven point. This will help you calculate how much to charge for your services. They will also help you analyze fixed and variable expenses on your income statement. Fixed expenses are unrelated to the number of patients your practice sees while your variable expenses directly correlate with patient volume.
Calculating variable expenses and dividing them by patient volume will give you the variable cost per patient in any accounting period. The gross payments made in every patient encounter should exceed the variable cost and contribute to your profit margin. If you find that the reimbursement you receive for your services is lower than the variable cost per patient, you will need to investigate the causes and make the necessary changes.
Cash Flow Statement
A medical practice’s cash flow statement offers insights into its overall liquidity by showing cash transaction activities. It reports cash inflow and outflow during an accounting period and provides a summary of the total cash available in your practice.
Cash flow statements are typically broken down into three parts: operating, investing, and financing. The net increase and decrease in total cash in these three areas will be reported on the cash flow statement:
Operating: This part of the statement shows the cash received from making sales during any given period. It also reflects the cash outflow required to realize those sales, including rent, salaries, and administration.
Investing: This portion shows asset purchases and any gains from invested assets.
Financing: Capital structure financing is shown here. This includes proceeds from debt and stock issuance and cash payments for obligations like interest and dividends.
Importance of the Cash Flow Statement
The cash flow statement is vital to a medical practice because it shows you how much cash the practice actually has available. This helps you make decisions about whether you need to receive payments in cash or can accept credit, and whether you can make payments in cash or will need to use credit to meet this month’s bills.
The cash flow statement also shows how much liquidity your medical practice has. Liquidity refers to your practice’s ability to settle its short-term liabilities on time and without difficulty.
Limitations of Financial Statements
Using financial statements is a great way to get a snapshot of your medical practice's finances during any given period. However, financial statements don't reflect some important elements that contribute to a business's financial position.
For example, a 2024 study into the importance of financial statements in clinical practice noted that financial statements alone don't account for factors like inflation, goodwill, market uncertainty, or medical equipment depreciation. This is why it's important to get support from experts with experience in healthcare accounting who can interpret your financial statements within the context of your business and industry.
How Financial Statements Help
Generating, reviewing, and understanding financial statements is crucial to stay on top of your medical practice's finances. The insights your financial statements bring you will offer the following benefits:
Sound Financial Health Assessment
Performance evaluation: Analyzing financial statements helps you assess your medical practice’s past performance, current financial health, and future prospects.
Identifying trends: Tracking financial metrics over time empowers you to identify trends and potential risks.
Informed Decision-Making
Investment decisions: Investors can make informed decisions about buying or selling stocks or bonds by analyzing financial statements.
Business strategy: Business owners and managers use financial statements to make strategic decisions about operations, investments, and financing.
Improved Risk Assessment
Identifying financial risks: Analyzing financial statements helps identify potential financial risks, such as liquidity problems or excessive debt.
Assessing creditworthiness: Lenders and creditors use financial statements to evaluate a company's creditworthiness.
Helps Ensure Regulatory Compliance
Adherence to accounting standards: Financial statements are required for compliance with accounting standards like GAAP and IFRS. Your medical practice may need to comply with these standards if it is a publicly listed company or a nonprofit or government organization.
Tax reporting: Accurate financial statements are essential for tax reporting and compliance.
Keep Your Medical Practice Profitable
Though doctors' primary concern is patient care, owning a medical practice also means understanding your financial position. Reviewing your income and balance sheets means you can make necessary corrections to ensure your practice stays profitable.
Many medical practices turn to professionals in medical practice accounting for expert assistance with the financial side of their business. Accounting professionals will help you better understand your financial statements and how to use them to build a thriving practice.
