Financial Management Flashcards
Why is a Petty Cash system suggested over using cash from the reception drawer for smaller purchases?
Improves internal controls by providing a system for tracking cash purchases
What percent of gross revenue is said to be lost to embezzlement in small businesses annually?
5%
Using the totals below what price should you charge for this service? • Fixed costs = $2.35. • Staff costs per minute = $1.82 • Staff time = 2 technicians, 6 minutes each. • DVM cost per minute = $3.09 • DVM time = 3 minutes. • Direct costs = $0.87 • Profit set point = 20%
(Fixed costs/minute + Staff costs/minute) X (Length of procedure in staff minutes) + (DVM costs/minute) X (length of procedure in DVM minutes) + (direct costs X 2) + Profit.
Formula = ($2.35 + $1.82) X (12 minutes) + ($3.09) X (3 minutes) + ($0.87 X 2) + 20%.
($4.17 X 12 = $50.04) + ($3.09 X 3 = $9.27) + ($1.74) + 20%
$50.04 + $9.27 + $1.74 =$61.05
$61.05 X 0.20 = $12.21
$61.05 + $12.21 = $73.26
$73.26
Client Credit Policy
establishes the pre-qualifications necessary to open a charge account. Example; a client may need a minimum of 2 years of perfect payment history without a problem.
Charge Account Policy
establishes credit limits, payment due dates, payment methods and invoicing procedures.
A simple method of creating an expense budget is to add what to the base expense figure?
The last three years average growth rate.
Patient volume is considered a _______ _______ of revenue growth
Key Driver
What is the final (or sixth) stage of budgeting (kudo points if you can name any other stages)?
- Determining the desired financial results.
- Analysis of the financial statements
- Normalizing the revenue and expenses
- Budgeting revenue
- Budgeting expenses
- Combining budgeted revenue and expense and making adjustments
What is the percent of gross if the gross revue is $1,250,000.00 and the expense is $87,365.00?
6.9%
expense / revenue = % of gross
Income Statement (profit & loss)
Core financial report
Balance Sheet
Assets = liabilities + owner’s equity
particular point in time
Cash Flow
where cash comes from, where it is used
Average net income of a practice (AVMA)
10-12%
Assets
Everything of value owned by a practice
Tangible Assets
Physical assets such as property, buildings and inventory, cash, equipment
Intangible Assets
Non-physical assets, software, trademarks, goodwill which add value to a business
Liabilities
debts, payables, mortgage
short term or long term
Equity
Equity = assets - liabilities
sometimes referred to as ‘net book value’
4 major areas regarding financial statements
- theory
- purpose
- practicality
- effect
Cash Based Accounting
when cash is received and expenses are paid
most common
Accrual Based Accounting
Revenue when earned, expenses when incurred
more accurate
required for practices if over $10M (IRS)
The ‘Purpose’ of financial statements
properly review what has happened in the period being measured
allows you to make good decisions
review monthly
understand past performance and use it as a basis for future trends
The “Theory’ of financial statements
based on either cash based or accrual based accounting
The ‘Practicality’ of financial statements
will help identify trends
recognize problems as they arise
The ‘Effect’ of financial statements
Use financial statements to make sound business decisions
enable the performance to be measured in historical and prospective terms
ie. high expenses warrant an investigation into why
Fixed Expenses
set cost. Don’t fluctuate (rent, insurance…)
Variable Expenses
will change based on business of the practice.
ie. staff costs will increase if you are busier
3 steps to troubleshooting the P&L
- Compare %’s
- Ask questions
- Implement change
Evaluating the profitability of a service:
Gross revenue Sq. footage used by the service fixed costs for entire practice fixed costs for sq. ft for the service variable costs
Minimum goal for a revenue centre
15 - 20% profit
ie. grooming
Balance Sheet
summarizes assets, liabilities and equities
No historical figures
also known as a Statement of Financial condition
The Financial Reporting Process - 5 steps
- Timeliness
- Accuracy
- Simplicity
- Sufficiently detailed
- Analytical
Financial Analysis Perspectives
principles to consider when analyzing finances
Safeguarding assets Pricing/fee structure Cost evaluation Procurement of capital Incremental performance (change in costs,cash flow, profit ) Accountability - profit centres Profitability Return on Capital
Return on Capital (formula)
income / avg. total assets = return on capital %
Percentage Statement Analysis
all expenses stated as a % of revenue. Compared with benchmarks, prior periods and budget performance
Variance Analysis
identifies the variance of a financial metric and may help explain why
ie. wage expense is over budget, prompt investigation
Ratios
financial relationships between various financial metrics
Net Profit Margin
net profit / revenue
Gross profit margin
gross profit / revenue
Average transaction charge
revenue / # transactions
Revenue per FTE
revenue / FTE
AR Turnover
credit sales / average A/R (higher is better)
Average A/R
Beginning AR + Ending AR / 2
What is more accurate? Cash based or accrual based accounting.
Accrual based
Which financial statement is considered most important for small business?
Income Statement (Profit & Loss)
Is staff payroll considered fixed or variable?
Variable
it changes
Payroll Deductions
Federal Tax
Provincial Tax
CPP - employee max $3166.45
- employer matches
- over 18
EI - employer share is 1.4% of employee share
- max amount $899.54What is a budget for A/R
no higher than 1.5%
Average Accounts receivable
beginning AR + ending AR / 2
A/R Turnover
credit sales / avg. a/r
Days in A/R
days in period / a/r turnover
A/R over _% needs intervention to get the entire team to follow and A/R policy.
3%
What does the A/R turnover calculation tell us?
- how many times the a/r balance is converted to cash
- the ration shows how efficient a company is at collecting credit sales from clients
% of gross
expense / gross revenue x 100
The Economic Cycle
The Business Cycle
predictable long term pattern changes in national income. Impact on consumer confidence, labour market and inflation
Economic (Business) Cycle - 4 Stages
- Expansion
- Prosperity
- Contraction
- Recession
6 Steps of Budgeting:
- Determine desired financial results (set a goal)
- Analyze financial statements
- Normalize revenue and expenses
- Budget Revenue
- Budget Expenses
- Combine budgeted revenue & expense and make adjustments
Analyze financial statements
step 2 of budgeting
Revenue - measure historical trends. Break down by profit centres
Expenses - Reorganize into 4 categories:
- Personnel
- Variable/COGS
- Occupancy
- Fixed/Admin
Normalizing Revenue & Expenses
step 3 of budgeting
Remove one time, non-recurring items
OR
Average of last 3 years
Budget Revenue
step 4 of budgeting
- project the revenue growth things to consider: patient volume services - add or discontinue economic conditions advertising fee increases demographics
Determining Constraints
- Avg. time of DVM appt.
- Avg. time of DVM procedure
- Avg. # of each that fit into an 8 - 10 hr day
- Consider 5 day work week and 48 weeks a year for potential and capacity
Budgeting Expenses
step 5 budgeting
Begin by normalizing figures
- last 3 years avg. growth rate + base expense
4 Expense Categories
- Personnel wages - apply estimated raise %
- consider future staffing needs - Occupancy - apply CPI (price index)
- Variable expense/COGS - historical % of revenue
- Fixed Costs/Admin - typically grows consistently with avg. growth % from last 3 years
Combine budgeted expense, revenue and make adjustments
step 6 of budgeting
Once complete, subtract budgeted expenses from budgeted revenue to derive an estimate for future profit.
Revenue - expenses = profit
Expansion, Prosperity, Contraction and Recession are 4 stages of :
The Business Cycle
What are 2 ways of normalizing revenue and expenses when creating a budget?
- Remove non-recurring items from previous year
2. Combine the last 3 years as an average
Which metrics are important considerations when creating a budget?
- last 3 years P&L
- all lease and loan documents
- Fee Schedule
- Operational changes expected in the next few years and their potential effect on revenue/expenses
- list of major capital
Client Credit Policy
establishes pre-qualification necessary for a client to open a charge account
Charge Account Policy
establishes credit limits, due dates, payment methods and invoicing procedures
In regards to creating a credit policy, what are the 2 sub policies you should begin with?
Client credit
Charge Account
What elements should be included in the charge account policy for the practice?
the process for flagging a pre-qualified client in the system
total invoice amount a client can charge without additional approval
A list of procedures to use when considering ways of extending credit to clients includes creating ranges of available credit amounts based on the clients longevity with the practice.
False
- good, paying client (not sliding scale based on length of time as a client
Calculating Cost of a Service
(FC per min + staff costs per min) x (length of procedure in staff min) + (DVM cost/min) x (length of time in DVM min) + (direct costs x 2) + profit
Fixed Costs/minute
determined from P&L will billable minutes the hospital is open
ie. open 10 hrs/day = 600 min
open 5 days/week = 3000 min
open 12000 min/mth
FC for the month are $20,000
20,000 / 12,000 min/mth = $1.67 per minute
Staff Costs per minute
non DVM staff cost / billable minutes staff cost @ $17,000/mth open 12,000 min/mth 17,000 / 12,000 = $1.42 staff costs are $1.42/min
if more than 1 staff, multiply by that #
Direct Costs
cost of supplies used x 2
Profit
Determined by management ie. 20%
What is the COnsumer Price Index?
A list or index of prices used to measure the change in the cost of basic goods and services.
The CPI can be instrumental in determining the cost of living increase for a variety of expenses associated with running a practice.
True
In relation to fee analysis, which of the following elements should be included in the calculation?
staff cost/min
DVM cost / min
FC /min
What % of gross is lost per year due to employee embezzlement?
> 5%
67.8% of practices have embezzlement
It is recommended that practices do not prosecute confirmed cases of embezzlement unless it’s over $2,000.
False
* always prosecute
What entity may be a good resource for the practice in the event embezzlement is suspected?
Your insurance carrier
Imprest Petty Cash
cash fund maintained for small purchases.
Set amount.
When depleted, receipts are added up and the fund is replenished.
Investigate when the receipts do not add up to the amount left.
BESP (Break Even Sales Price)
FC + VC
BESP (Break Even Sales Price) including profit
SP = FC + VC + P
Theory Y
employees can be self directed
Theory X
people prefer to be directed
