Session 8 Financial Part 1 Flashcards
Chart of Accounts
Systematic listing of all account names and numbers used by a company.
Only things used in the normal course of business
Profit and loss statement
Aka income statement
Core financial report, which covers a specific period of time and reports revenue minus expenses to show net income during that period
Balance Sheet
Snapshot of financial condition of the practices assets, liabilities and owner equity at a specific point in time
Cash flow statement
Shows where the cash in the practice comes from
Net income
= profit
Determined when expenses are subtracted from income
Average net income of a practice in a year
10-12%
Intangible property
non-physical property that has values
Ex: goodwill, copyrights, noncompetes
Accounting equation
Assets = liability + owner equity
What does the balance Sheet provide?
Info for the accounting equation
Assets
Everything of value owned by the practice
Tangible or intangible
Current Assests
Items that will be consumed in a short period of time, typically a year
Fixed/Long term Assets
Extended longer than a year
Liabilities
Practice debt (money owed to lenders, vendors and more).
Can be short term or long term
Short term liabilities
Accounts payable
Long term liability
Mortgage
Equity equation
Assets - liability
Equity definition
Shows net worth of the practice.
(Sometimes equity is referred to as a net book value)
COGS
Cost of goods sold
COGS definition
Products used to produce a service to the client or products sold to the client
Tangible assets
Land
Equipment
Inventory
Lease hold improvement
Intangible assets
Computer software licenses
Copyrights
Noncompetes
Client/community goodwill
Current Asset example
Inventory
Examples of long term assets
Building
Land
Equipment
Copyrights
Goodwill
4 major areas of financial statements
Theories
Purpose
Practicality
Effect
Theories of financial statements
Accounting methodologies
Accounting methodologies
Cash based accounting
Accrual based accounting
Cash based accounting
Recognizes revenue when cash is received and expenses when they are paid.
Allows for clear vision of day to day operations
Why is it important to pay expenses in a timely manner when using cash based accounting?
To avoid overstating net income
Which accounting method do practices use most often?
Cash based
Accrual based accounting
Recognizes revenue when it is earned and expenses when they are incurred. When goods are received and services performed.
Is accrual or cash based accounting more accurate?
Accrual
Typically which type of practices use accrual based accounting
Corporates
Purpose of financial statements
Enable owners and managers to properly review what has happened in the period being measured
Who should be part of the monthly statement review?
Key employees and department heads
Segmented statements
Statements can be segmented by department
Ex: boarding, so it can be isolated as a stand alone profit center
Purpose of financial statements
Understand the past performance of the practice and use past performance as a basis for future trends
Understanding practicality
Financial statements reviews will identify trends and may recognize issues
day-to-day approach to financial statements
Necessary to running a practice
What is the effect of using financial statements
Enable the financial performance of the practice to be measured in historical and prospective terms
Ex: realizing higher than expected expenses warranting more investigation. Otherwise it would not be noticed and grow out of control.
Why is it insufficient to just accurately report financial performance?
You need to use the statements as a management tool to to make sound and thoughtful business decisions
Which is the most important financial statement?
P&L
Comparing line items of the p&L
Compared by presenting prior year and current year under review
Most accurate way to state expenses on p&l
State expenses as a % of revenue
% is more accurate than dollars
Fixed expenses
Set cost to hospital. Don’t fluctuate with how busy the practice is.
Ex. No matter how many clients you see in a month rent stays the same, doctors salaries stay the same
Variable expenses
Change with the amount of business produced by the practice
Ex:
COGS
DVM wages on production
Staff Payroll (could be argued either way)
Trouble shooting the P&L
When %s in a specific category are not what was expected or in alignment with historic figures, an investigation is in order
3 steps of analyzing unexpected figures in P&L
- Compare %s
- Ask Q’s of the %s
- Implement change
Example of unexpected numbers on a P&L and questions to ask
Historically utilities have consistently been 1.2% - 1.6% of gross and this month it is 5.4%.
Was an invoice paid late? (Doubling an expense in a given month?)
Did income drop significantly to create the % of gross increase?
Was the expense misclassified?
Importance of Comparing income and expense center on the P&L
If a center is not managed it cannot be improved.
Steps to evaluate the profitability of a service
Gross revenue per month (or year) of a specific service
Square footage used by the service
Fixed costs for the entire practice
Fixed costs per square foot for service
Example of evaluating profitability of a service
- Dental center produced $9989.45 and used 100sq feet of the practice
- annual fixed cost/sqfoot = $190
(From p&l fixed costs admin, DVM, facility, equipment)
- total annual fixed costs = $19,000
(100sq ft x $190) - Fixed costs are $1583.33/month
- annual cost divided by 12 - Variable costs are $525.39/mo
- Monthly net income for the center is $7880.73
- 9989.45 - 1583.33 - 525.39 = 7880.73
The balance sheet
Summarizes assets, liabilities and equities of the practice at a specific time and offers no historical data
Who to ask for Balance sheet help
May require assistance of an accountant to complete
Real estate and the balance sheet
While real estate could be increasing in value - it is general not represented on the balance sheet.
Balance and checking account
Should not match the bottom line of the p&l
How soon after the month should reports be generated
Typically 5-10 days after the end of the month
How to ensure accuracy in statements
Independent audits
Or
Completing a similar review by using accountant’s compilation
Why is simplicity important
Ease of use and interpretation
Statements need to be
Timely
Accurate
Simplistic
Sufficiently Detailed
Analytical - worthy of analysis against previous year
Financial analysis perspectives
Safeguard assests
Pricing/fee structure
Cost evaluation
Procurement of capital (financing and/or investors)
Incremental performance
Accountability via Departmentalization
Profitability analysis
Return on capital analysis
Accountability via departmentalization
Profit centers that have their own statement of performance may offer additional insights into the profitability of the various centers
Ex: boarding, grooming, retail
Profitability analysis is used for
There is true profitability for measuring fiscal health and then the profitability number used for tax purposes.
What to consider in a profitability analysis
Depreciation of assets
Owners compensation
Rent to owner
Any owner discretionary expenses
Return on capital analysis
Income divided by total assests = return on capital %.
When is return on capital analysis measured?
Before interest, taxes, depreciation, and amortization.
KPI
Basic statistics used to measure performance, compare benchmarks, and identify and explain changes.
What do common KPIs include?
Total revenue and total transaction by month
Average transaction charge by month
New clients and lost clients by month
Revenue, transactions, and average transaction charge per DVM per month
Revenue by category (VXNS, lab, etc)
Accounts receivable by aging classification (30, 60, 90 days)
How do KPIs typically work?
Entered into a spreadsheet that compares the same period from the previous year
Percentage statement analysis
All expenses should be stayed as a % of revenue on the income statement and should be compared to benchmarks, prior periods and budget performance
Variance analysis
Identified the variance of a financial metric and may help explain why.
Ex: wage expenses that are significantly over budget will prompt an investigation
Ratios
Represent financial relationships between various metrics
Net profit margin equation
Practice profit ÷ practice revenue
Net profit margin definition
Measures simple profit of the practice.
Gross profit margin equation
Gross profit ÷ revenue
Gross profit margin definition
Measures how much profit is in a product or service
Average transaction charge equation
Practice revenue ÷ practice transactions
Revenue per full time DVM equation
Practice revenue ÷ full time DVMs
Accounts receivable turn-over equation
Credit sales ÷ average accounts receivable
Accounts receivable turn over
A higher number is better as it indicates the accounts receivable balance is converted to cash more often.
Which financial statement is the most important for small businesses?
P&L
Is staff payroll considered a fixed or variable expense
Variable when looking at it finances
Payroll methods
Manual
Automated in-house processing
Third party
Manual payroll
Involves totaling the amount of time worked, calculating gross wages, calculating and deducting all appropriate taxes, deferrals, and deductions, then writing the check.
Who is always liable for payroll errors?
Employers
Automated in house processing
Utilities a payroll specific software program such as quick pay to create a paycheck
Which payroll method has the highest risk of errors?
Manual
Benefits of automated in house processing
More efficient
Reliable calculations
Offer the option to schedule regular or reoccurring deductions
Automatically creates and maintains legible payroll records
Third party payroll services
Offers convenience, expertise, savings
It is expected that these companies remain UTD worth the most current regulations and tax tables to lower errors
Payroll period
Length of time covered by each payroll session.
Types of payroll periods
Weekly
Biweekly
Semi-monthly
Shift-differential
Weekly payroll
Issued 52 times a year
Biweekly payroll
Issued 26 times a year
Pro of biweekly payroll
Reduced cost due to decreased time invested in managing
Cons of biweekly payroll
26 doesn’t divide evenly into 4 quarters of the year
2 quarters will have 6 pay periods
2 quarters will have 7
The timing is inconsistent from year to year making it hard to compare historic data for that specific expense
Semi monthly payroll
Issued 24 times a year
Typically paid on the 1st and 15th of each month
Shift differential
A wage premium used in 24 hours facilities to make less desirable shifts more rewarding.
Usually a dollar amount per hour in addition to employee usual wage
Payroll deductions
Only applies to employees not independent contractors
Federal payroll taxes
Employers are responsible for withholding federal income tax and forwarding to the IRS.
The amount of tax withheld is based on the amount of salary and allowances taken
FICA
Federal insurance contribution act
FICA is ….
A tax paid by both the employer and employee to fund Social Security and Medicare
FUTA
Federal unemployment tax act
What is FUTA?
A tax paid by employers only and only the first $7,000 of an employees earnings is taxed for FUTA
State payroll taxes
Vary from state to state, but often include state income tax and unemployment tax
Misc deductions
Can vary from state to state
Employee portion of medical
Balance employee owes to practice
Some states require school district tax, disability insurance tax, city income tax and more
Requirements for wage and tax reporting
EIN
I-9s
W-4s
Income tax
File form 941 and 940
Distribute W-2s
File W-3s
Form 941
Employers Quarterly Federal Tax return
Form 940
Employers annual federal tax return
W-2
Wage and tax statement
W-3
Transmittal of Wage and tax statement
Send to IRS with W-2s
W-4
Indicates employees requested holdings
Payroll internal controls
Steps to protect your practice from payroll fraud
Examples of payroll internal controlls
Maintain a written policy providing clarity on:
Definitions of full time and part time
When and how payroll is accrued and if it rolled over at the end of the year and if it is paid out at termination
Require management approval to any change made to payroll records/personnel info
Restrict access to payroll and personnel files to a need to know basis
Segregate duties for managing payroll and personnel data
Personnel records should include
Date of hire
Pro paid vs used
Nonpaid time off vs used
Tradiness
When using a payroll company
Internal records should be compared to the payroll companies to catch any discrepancies. Periodically review all payroll transactions.
Time clock
Monitor to be sure employees are not clocking in for each other.
Payroll advances
Track carefully and payback should be via payroll deductions
Contractors payroll taxes
Contractors are responsible for their own payroll taxes and are paid a straight fee by the practice
When to issue a 1099 form
At the EoY any contractor who received more than $600 in wages from the practice must be issued a 1099 form
What is stated on the 1099 form
All monies paid to the contractor are on an untaxed basis
When is the practice liable for 1099 taxes
If the contractor fails to lay their taxes and the practice did not issue a 1099 form at the EoY
FICA is paid by who?
Both employer and employee
Which payroll tax is paid by the employer and only on the first 7,000 of an employees earnings
FUTA
SUTA
State unemployment tax act
What is an EIN?
A business identification number assigned by the IRS to ID tax accounts of employers
Accounts payable
Amounts owed to your suppliers that are payable in the future.
Steps of accounts payable
- All employees who unpack a shipment should initial the packing slip/invoice confirming items in the shipment
- Prices should be compared to the current price in PMs for updating
- All packing slips/invoices should be compared to monthly statement and should reconcile exactly
- All reviewed info be passed to bookkeeper/manager paying bills
How frequently should you monitor accounts payable?
Monthly to safeguard against spending more than receiving
Early detection of accounts payable is critical for what?
Avoid financial damage to the practice
Some smaller younger practices spend more than they make some months
What to do if financial hemorrhaging occurs
Decrease spending and increase revenue
Hold employees accountable for waste
Consider reevaluating fee structure
Review client charges to ensure none are misses
If a line of credit is needed for short term safety have plan pay back as soon as possible
Accounts receivable (AR)
Monies owed to the practice for services rendered or products sold that have not been paid for at the time of service or product dispensing
People that owe you money
What is an acceptable AR
Practices should keep AR no higher than 1.5% of gross revenue
When should AR get the focus of the entire team to follow a practice policy that tightly manages AR?
When the AR is over 3%
Compromise for charity case
Flex account sustained by client contributions and/fund raisers. Consult state laws and CPA and set up strict guidelines for staff to follow
What is one compromise to enable the team to help an occasional charity case?
Institute a flex account that can be financially sustained by client contributions or fund raisers. The creation should be discussed with CPAs and state laws and strict guidelines for use should be in place
NSF
Non sufficient funds
3 choices for When a check bounces
Eat it
Attempt to collect as a practice
Send to collections
How to avoid NSF checks
Use a check machine or verification service to verify funds in real time
Most cost effective method for money transfers
Real time transfer
Policy for NSF checks
Place a bounced check fee on client account to recoup some cost for lost time and money
What will increase chances of collection of an NSF check?
Documenting drivers license number on the check
Why does the drivers license number on checks help?
Stolen checks may require the number for prosecution
Part of the best practice to help prevent fraud
2 basic ways of accepting payment to an account with outstanding balance
Manually
Computerized accounts receivable management
Manual AR payment
Manage carefully to prevent internal embezzlement.
Riskier and involves many steps
Computerized AR management
Eliminates errors and decreases employee embezzlement
All calculations, interest, and statement fees are automatically calculated and added to the clients account
No charge policies
Managers are responsible for creating and enforcing credit policies
Payment expected at time of service sign
Not adequate
Estimates
Must be given to all clients whose pet will receive services
Needs a client signature for legal documentation of consent
Deposits
Should be at least 50% of the expected total cost of service
No-charge policy within the team
All team members need to understand and accept the policy
Holding checks for delayed payment
Accepting a check dated with the date it was accepted but holding the check to deposit at a later date
Why are holding checks for delayed payments not acceptable
Add to level of difficulty for reception in storing, tracking payment date and depositing in the correct date
No guarantee the funds will be available
Increases error
May cause client to leave practice and request to be reimbursed for returned check fees for practices negligence.
Accepting post- dated checks is illegal in many states
When should AR accounts be paid?
Within 30 days
When should clients be sent statements?
Immediately after services are performed as collection chances are higher when the service is still fresh in a clients mind
How should clients with no payment in over 60 days be notified?
Handwritten note on statement with a brightly colored overdue sticker on the statement.
Fair debt collection practices act
Dictates that the sticker cannot be placed on the outside envelope
What to do if a client hasn’t paid in 90 days.
Notify that unless they pay they will be sent to collections
Have team members call the client to attempt to collect payment
Turn it over to collections
Flag client account to avoid rendering future services
Other options for accounts past 90 days
Write off amount as bad debt
Small claims court, but can be costly
Fair debt collection practices act regulates?
Regulates collection procedures of past due accounts
Why was the fair debt collection practices act passed?
To protect the public from unethical collection procedures and mainly applies to collection agencies, but must be considered as the practice team attempts to collect debt
What does the fair debt collection practices act state?
Debtors can’t be subject to harrasment, oppressive tactics, or abusive treatment
Clients may not be called at work if it inconvenient times (outside hours of 8am - 9p)
Prohibits collectors from making false statements (pretending to be lawyers)
Accounts details may only be discussed with clients themselves
Collection over phone procedure
Use caller ID blocker
Counsel team not to take negative words personally
Introduce yourself
Keep conversation focused on account collection
Confirm who you are speaking with
Document
Can you leave a voicemail when attempting to collect payment?
Yes, but only to introduce yourself and leave a call back number. No account specifics should be disclosed
Should collection letter include a thank you at the end?
Yes
Employee AR
All practices should have a written policy
If an employee has an AR balance what is the max amount that should be allowed?
$100
What should be the payment policy for employee AR
Monthly payments
Can you deduct employee AR balance from paycheck?
Check state laws
Need permission
Must not allow the check to dip below minimum wage
What info does a collection agency need?
Client full name, address and all phone numbers
Total balance on account
Client occupation if known
Clients work address if known
Clients driver license number
Copy of client info sheet and signature of client guaranteeing payment for services rendered
What will collection agencies charge?
40-60% of balance being collected
AR calculation
AR calculations
AR turn over
Days in AR
Determine liquidity, solvency and profitability
Average AR
Beginning AR + Ending AR ÷ 2
AR turnover definition
How many times the AR balance is converted into cash
AR turnover calc
Credit sales ÷ average AR
Credit sales
Only credit sales not cash sales
Credit sales and average accounts should be from the same time period
Do you want a higher or lower AR turnover
A higher value because it indicates the AR balance is turned to cash more often
Days in AR equation
Number of days in period ÷ AR turnover
Example of AR turnover
AR turnover for the year = 12
365÷12=30.42
AR turnover is every 30 days
MEANING: the practice would need 30 days of working capital to maintain the practice’s cash flow needs
AR alternatives to extending credits
Pet insurance
Care credit
Held credit card payments
Wellness and preventative care packages
Held credit card payments
Having a credit’s card number on file for a payment plan
What does the AR turn over tell us
How many times AR is turned to cash
Ratio of how efficient the company is at collecting credit sales from customers
