While most practice owners and managers understand and frequently review their profit and loss statement, the balance sheet is often ignored. However, the balance sheet holds significant key information about the financial health of your practice, and when appropriately used as a tool for understanding your business, can help grow your practice value, improve your cash flow position and increase your financial strength.

 

Every business is structured slightly differently depending on the legal form of the business, the number of owners, etc. However, there are several line items on every balance sheet that should be considered:

 

Cash

This includes all checking and savings accounts and any cash on hand kept in your register or even under your mattress. In general, it is always a good idea to keep enough cash in the business to cover at least two months of expenses. While it is unlikely that you will ever use all the cash, having a healthy cushion available in case there is an unexpected expense or sudden decrease in business, will not only help you sleep at night, but will also ensure that you will not have to rely on loans to keep you afloat when business takes a turn for the worse.

 

Accounts Receivable

Most small animal practices no longer offer payment plans to clients, except in very special circumstances. If you are a large or mixed-animal practitioner or if you do have accounts receivable, it is crucial that you review your Accounts Receivable Aging at least monthly. This is a listing of all accounts receivable, when the invoice was initiated and how long the invoice has been outstanding. Any invoices that have been outstanding for more than 90 days, should be considered non-collectible and should be written off or turned over to a collections agency. Because of this, it is crucial that when payments are received, they are correctly applied to the outstanding invoice(s) being paid.

 

Inventory

Frequently, the value of inventory recorded on the balance sheet is either the amount recorded by your accountant at the end of the prior year or possibly even the amount recorded at the time you purchased the practice. The value of inventory on your balance sheet should always be a reasonable representation of the actual inventory on hand at the practice. This means that periodic inventory counts should be performed and matched to the most recent costs of each inventory item. This can take the form of a complete inventory count every three to four months or it can be in the form of a rolling monthly count i.e. each month a different group of inventory items is counted. This will not only help you better understand how much money you have invested on your inventory, but it will also help you lower your costs of goods sold by identifying where inventory is leaving the practice either through theft or through not being accurately invoiced to clients.

 

Long-Term Assets

This includes primarily fixed assets (building or leasehold improvements, medical equipment and computer or office equipment) and intangible assets (goodwill, non-compete covenants and capitalized loan fees). You may not have all these items on your balance sheet depending on how you acquired your practice and if you rent or own your building. Fixed asset totals will change when you purchase an item that costs more than the minimum amount allowed by the IRS (currently $750). A fixed asset is an item that will be used to generate ongoing revenues for the business versus a supplies expense that can be used only once. For example, if you purchased a surgical cautery system that would be considered a fixed asset. However, if you purchased a surgical hip implant that could only be used in one patient, that would be considered supplies.

 

Intangible assets are recorded at the time the practice is acquired and the balances rarely change. These expenses are amortized over their useful lives at consistent annual amounts that will usually be calculated by your tax accountant.

 

Current Liabilities

This includes amounts that are due within 12 months or less, such as accounts payable, payroll liabilities and credit card balances. These items will typically fluctuate each month as you incur and pay expenses, payroll and payroll taxes. By reviewing these items each month you can quickly identify if any of your accounts are not being paid regularly, if you have payroll taxes due or if your credit cards are not being paid in full.

 

Long-term Liabilities

If you financed the purchase of your practice, the loan will be reflected as a long-term liability on your balance sheet. Occasionally, your accountant will break out the portion of the loan that is due within the next 12 months and reflect this as a current liability. Ensure that the amount of the loan reflected on the balance sheet agrees to the amount the lender says you owe, including any outstanding principal and accrued interest. Even if you are not making regular payments make sure that accrued interest is correctly recorded on your balance sheet so that you are accurately reflecting the amount due to the lender. As loans are paid off in full they should show a zero balance on the balance sheet.

 

Equity

This is often the least understood and most frequently overlooked section of the balance sheet. Essentially, this section reflects your investment in the business and is a function of how much cash you have put in to the business (owner's contributions and capital), how much profit (or loss) the business has made, and how much cash you have taken out of the business (owner's withdrawals). If equity is negative, that means that you have taken more money out of the business than what you have put in plus what it has produced. This means that you are draining your business of funds needed for it to operate effectively. If equity is positive, this indicates that your practice is in a strong financial position, that you are not relying too heavily on loan financing and that you are not draining your business of surplus cash.

 

Summary