Financial Pt 1 - 17 % Flashcards
Maximizing inventory turnover is key strategy in creating an efficient and profitable inventory system. Name four ways to increase your inventory turnover.
1)Product consolidation
2) Order quantities that make sense
3) Measure and increase compliance
4) Doctor and Staff product education
What is a “Chart of Accounts” -
Systematic listing of all account names and numbers used by a company. It is recommended that practices include on the Chart of Accounts only those they will use in the normal course of business.
What is a “Profit and Loss Statement” -
The Profit and Loss statement is also known as the Income Statement. The Profit and Loss Statement (P&L) is the core financial report, which covers a specific period of time and reports revenue minus expenses to show the net income during that period. (Generally no less than 1 month).
Revenue - Expenses = net income during that period.
What is a “Balance Sheet” -
The Balance Sheet is a statement of the financial condition of the practice listing its assets, liabilities, and owner’s equity. It is measured at a specific point in time only. It doesn’t forecast and it provides no historical function. It provides all of the information to create the accounting equation ……. Assets = Liabilities + Owner equity.
What is a “Cash Flow Statement” -
Shows where the cash in the practice comes from and how it is used.
What is “Net Income (profit) “ -
Is determined when the expenses are subtracted from the income , with the obvious goal of having a positive number as the result. According to the AVMA the average net income general practice produces in a given year is 10% - 12%. Managers must maximize income and minimize expenses to achieve that goal.
*Profit trumps revenue to an extent especially when you are looking at the bottom line as to how healthy your hospital is.
What is “Intangible property” -
Non-physical property that has value. Examples are copyrights, goodwill, and non-compete agreements.
What are “Assets” -
Assets are everything of value owned by the practice. Assets can be tangible such as land, equipment, inventory, lease hold improvements. Or they can be intangible such a computer software licenses, copyrights, covenants not to compete or even client or community goodwill (What do you mean to the clients and community - there is a value to that).
Describe current assets -
Current assets are items that will be consumed within a short period of time, often a year.
*Inventory is considered a current asset.
What are fixed or long term assets -
Fixed or Long Term Assets are extended longer than a year.
Ex - Your building and your land (assuming your practice isn’t leasing), your equipment, and some intangibles such as those copyrights and goodwills (those last, those aren’t quick fixes).
What are “Liabilities” -
Liabilities are practice debts or money owned to lenders or other parties. They can include short term liabilities such as accounts payable, as well as long term liabilities like a mortgage on the practice.
What is “Equity” —
Equity is assets minus liability. In theory ; it shows the net worth of the practice. Equity is sometimes referred to as a net book value.
Assets - liability = Equity.
Describe “Cost of Goods Sold (COGS) -
Cost of Goods Sold (COGS) is defined as the products used to produce a service for the client, or products sold to clients.
Cost of Goods Sold is generally considered a variable expense that follows a very serious current trend of business at your practice. *The more patients seen, diagnosed, and treated, the higher your cost of supplies.
What are the four major areas of a Financial Statement ?
1) The Theories
2) The Purpose
3) The Practicality
4) The Effect
The next, and most important step, is using the financial statements as a management tool to make sound and thoughtful business decisions.
1 Theories of Financial Statements - areas of a Financial Statement
What is cashed base accounting?
Cashed Based Accounting Recognizes revenue when cash is received and recognizes expenses when they are paid. This method allows for a more clear vision of day to day operations. It is important when running on a cash based system that the practices expenses are paid in a timely manner to avoid overstating its net income.
The majority of practices use cash-based accounting. (SINGLE OWNER PRACTICES, NOT CORPORATE)
1 Theories of Financial Statements -
Accrual Based Accounting (Usually used by corporate practices - very few self owned practices use this form of accounting due to its complexity). The IRS requires this method for all companies with a gross revenue of over 10 million dollars annually.
Accrual Based Accounting - recognizes revenue when it is earned and expenses when they are incurred. When goods are received, and services are performed. **As a general rule accrual based accounting is considered more accurate. **Does a poor job of tracking cash for the practice.
Let’s say that you purchased a large stock order of HWP for $3000.00 in June. Let’s say that you sold all of the HWP in June, July, and August for $6500.00. Under the accrual method of accounting, you would show sales of $6500.00 and expenses of $3000.00 which would result in a net profit of $3500.00 ($6500 - $3000) for the month of June. Since sales and purchased count immediately, you can record them on your books immediately and show the actual profit made for the month of June.
The Purpose #2 - areas of a Financial Statement
Understanding the purpose - Financial reports enable ownership and management to properly review what has happened in the period being measured.
Some considerations:
- Thorough review of the financial statements should be part of the monthly routine of the owner and manager of the practice. Key employees and department heads should also be part of the review.
- Statements may be segmented by department, for example a separate income statement exclusively for boarding to isolate that department as a “Stand-alone” profit center.
- One purpose of the financial statements is to understand the past performance of the practice and use past performance as a basis for future trends.
Understanding Financial Statements -
#3 the Practicality - areas of a Financial Statement
Basic financial statement review will identify trends or may recognize problems or issues that need attention.
Applying a day-to-day approach to financial statements is not only beneficial butt necessary to running a successful practice.
The practice owner should not be apprehensive about a lack of extensive accounting training or knowledge.
The Effect #4 - areas of a Financial Statement
Financial statements provide information about many things and enable the financial performance of the practice to be measured in historical and prospective terms.
One example of a possible effect of financial statement review is realizing higher than expected expenses which would warrant further investigation. Without regular financial statement review expenses could become out of control without noticing and being able to implement strategies to reverse it.
**It is insufficient to just accurately report financial performance. The next, and most important step, is using the financial statements as a management tool to make sound and thoughtful business decisions.
The Income Statement (profit and loss statement or P & L) - Is the most important of the financial statements.
Beginning with the entry of income and entry of expenses that are subtracted from the income to show a profit or loss.
It is important that the income statement (profit and loss or P&L ) sheet is detailed as possible to aid in determining where inconsistencies may lie by comparing benchmarks.
All entries must be entered consistently in the correct “category” (more about chart of accounts in section 5.08), in order to be able to compare income Vs expense for each income center to be sure they are producing an acceptable profit.
**THE LINE ITEMS OF THE INCOME STATEMENT/ PROFIT AND LOSS/ P&L ARE COMPARED BY PRESENTING BOTH PRIOR YEAR AND CURRENT YEAR UNDER REVIEW.
Stating expenses as a percentage of revenue is an extremely valuable tool to ensure accurate interpretation and comparing to historical performance. Percentages will give a more accurate picture than dollar amounts.
What is an expense?
Any outflow of money that is owed to another company to pay for a service or product.
________________in general they are a set cost to the hospital and do not fluctuate with how busy the practice may or may not be.
An example would be rent, most utilities, medical insurance, managers salary, a doctors salary.
This would be a fixed expense.
_____________ will change with the amount of business produced by the practice.
Example would be COGS (cost of goods sold…example the # of vaccines is variable depending on the amount of business the practice experiences), DVM wages if paid on production, Staff payroll.
This would be variable expense.
What are the three steps in analyzing P&Ls when unexpected figures are present?
1)Compare percentages ( if you are a whole lot busier or slower this year than you were last year you might have spent a whole lot more or a whole lot less dollars in a category, but if the percentages remain constant your looking pretty good)
2) Ask questions of the percentages (Do they look correct, did the percentages change)
3) Implement Change ( if you can based on the information from your P&L)
Comparing Income and Expense Center on the P&L - if a center is not managed, it cannot be improved.
Steps to take to evaluate the profitability of a service:
*Gross revenue per month (or year) of the specific service.
*Square footage used by the service
*Fixed costs per square foot for service.
Example:
1) Dental center produced $9889.45 and used 100sq ft of the practice.
2) Fixed cost are $1583.33 /month
3) Variable costs are $525.39 / month
4) Net income for the center is $7880.73
Equipment used for this category is in with fixed costs
Financial Report Construction and Details of the Balance Sheet (Also know as the Statement of Financial Condition of the Practice)
The Balance Sheet -
*Summarizes assets, liabilities, and equities of the practice at the time of the statement and offers no historical figures.
*Represents the very basic accounting equation of
Assets = Liability + Owner Equity
*Balance sheets may require the assistance of an accountant to complete.
**Although real estate may be increasing in value, this increase is generally not represented on the balance sheet **
Financial Report Construction and Details of the Balance Sheet (Also know as the Statement of Financial Condition of the Practice)
The Balance Sheet -
*Summarizes assets, liabilities, and equities of the practice at the time of the statement and offers no historical figures.
*Represents the very basic accounting equation of
Assets = Liability + Owner Equity
*Balance sheets may require the assistance of an accountant to complete.
**Although real estate may be increasing in value, this increase is generally not represented on the balance sheet **
__________________ are things of value such as cash, equipment, inventory or buildings.
Assets.
_______________ is the practice debts; money owed to the creditors.
Liabilities.
_________________ is the owners claim on the practice assets; portion of the practice assets that belongs to the owner not the creditor.
Owner Equity.
Financial Report Construction and Details of the Cash Flow Sheet - (Cash flow sheet is rarely used. Slightly more complicated to create.
**illustrates the cash that has been generated by the business minus the cash that has flowed out of the business, rendering the cash total at the end of the year.
**The Cash Flow Statement seems to be rarely used, and some reasons include that they can be slightly more complicated to create, and also because the information is not much different from the P&L….
Except as author Pendergast states : Managers are often under the impression that the bottom line on a Profit and Loss statement should equal the balance that is in the checking account wich is actually not true. There is a lot of reasons for that, inventory has been purchased but not sold yet. Accounts receivable hasn’t been settled yet, expenses have been paid but they haven’t cleared the checking account yet…. So on and so forth.
The Financial reporting process — Reports should be generated within _________ business days after the end of the month.
5-10 business days.
The financial reporting process -
Timeliness - reports should contain recent historical results and be created quickly at the end of the reporting period.
Accuracy - Reliable and accurate data is essential if financial statements are to be useful for decision making. **Accuracy is ensured through an independent audit
Simplicity - The typical veterinary practice should use reports that are east to interpret.
Sufficiently Detailed - maintain simplicity while being sufficiently detailed to aid decision making.
Analytical - the information should be worthy of analysis containing data from the previous year (or other comparison period) and also industry benchmarks and budgets.
Financial Analysis Perspectives - what are principles to consider when analyzing finances?
*Safeguarding assets - assets should be protected and should be accounted for.
*Pricing/Fee Structure - is it adequate? (Poorly calculated pricing can absolutely cripple your revenue).
*Cost evaluation - consider the cost of services and sales.
*Procurement of Capital (financing and/ or investors) - obtaining resources from the owners and creditors, repaying borrowed amounts, and assuring and measuring owners return on investment.
*Incremental performance - can be itemized via departments of profit centers. The key ingredients of measuring incremental performance included; change in costs, cash flow, profit, and/or investment in that category.
Financial Analysis Perspectives - Principles to consider when analyzing finances.
*Accountability via departmentalization - profit centers (such as boarding, grooming, retail sales) that have THEIR OWN STATEMENT OF PERFORMANCE may offer additional insights into the profitability of the various centers.
*Profitability analysis - there is true profitability for measuring fiscal health and then the profitability numbers used for tax purposes. When measuring true profitability take into consideration ; depreciation of assets, owner compensation, rent to owner, and any discretionary expenses.
*Return on capital analysis - (Minus) income/average total assets = returns on capital %
Typically measured before interest, taxes, depreciation, and amortization.
Key Performance Indicators (KPI) - basic statistics used to measure performance, compare benchmarks, and identify and explain changes. KPIs are usually entered into a spreadsheet that compares the same period from the previous year. A practice can measure /track and KPI that is helpful. **Measure what matters to you and what you can do something about.
The common KPIs Include:
*Total revenue and total transaction by month.
*Average transaction charge by month.
*New client and lost clients by month.
*Revenue, transactions, and average transaction charge per DVM per month.
*Accounts receivable by age classification (30, 60, 90 days)
Final Considerations Regarding Financial Analysis -
*Percentage statement analysis - all expenses should be stated as a percentage of revenue on the income statement and should be compared with benchmarks, prior periods, and budget performance.
*Variance analysis - Identifies the variance of a financial metric and may help explain why.
Example; wage expense that is significantly over budget will prompt investigation.
Final Considerations Regarding Financial Analysis -
*Ratios - represent financial relationships between various financial metrics.
Examples include;
Net Profit Margin = practice profit / practice revenue. Measures simple profit of the practice. A higher value indicates more revenue that falls to the bottom line instead of being consumed by expenses.
Gross Profit Margin = gross profit/ revenue. Measure how much profit is in a product or service.
Average Transaction Charge = practice revenue/ practice transactions. Ideally should be continually increasing.
Revenue per full time DVM = Practice revenue / full time DVMs
Accounts receivable Turn-over = credit sales/ average accounts receivable. A higher number is better as it indicates the accounts receivable balance is converted to cash more often (This is your goal)
Net Profit Margin - Measures simple profit of the practice. A higher value indicates more revenue that falls to the bottom line instead of being consumed by expenses.
What is the equation?
Net Profit Margin = practice profit / practice revenue.
Gross Profit Margin - Measure how much profit is in a product or service.
What is the equation….
Gross Profit Margin = gross profit/ revenue
Average Transaction Charge - Ideally should be continually increasing.
What is the equation….
Average Transaction Charge = practice revenue/ practice transactions.
Revenue per full time DVM.
What is the equation…
Revenue per full time DVM = Practice revenue / full time DVMs
Accounts receivable Turn-over = A higher number is better as it indicates the accounts receivable balance is converted to cash more often (This is your goal)
What is the equation…
Accounts receivable Turn-over = credit sales/ average accounts receivable
What is considered more accurate, cash based accounting or accrual based accounting?
Accrual based accounting is more accurate.
Which financial statement is considered the most important for small businesses?
A) Cash Flow Statement
B) Balance Sheet
C) Profit and Loss Statement
C) The Profit and Loss Statement
Is staff payroll considered a fixed expense or a variable expense?
Staff payroll is considered a variable expense.
