Understanding Financial Statements

Today's blog gives some more pragmatic information on your business. They can't nor should all cover the soft skills right?

Financial statements are an important management tool. When correctly prepared and properly interpreted, they contribute to an understanding of the current financial condition, problems, and possibilities of a company.

What does the bank look for when processing a credit application?

• Immediate liquidity (cash) and how cash is being used in the business’ operations
• Assets you have available to use as collateral
• Long-term earnings potential (ex. how much profit will this business likely make in the future?)
• The cash available to pay interest on a loan
• Cash you have available to repay the principal of a loan
  

There are three basic financial statements:

• Balance Sheet
• Income Statement
• Statement of Cash Flows

The Balance Sheet

This is sometimes called the Statement of Financial Condition or the Statement of Financial Position. It represents the financial position of the business entity at a moment of time – a snapshot. Most often the balance sheet from one or more preceding years is presented to provide meaningful information on how the company is performing.

The Balance Sheet is so named because it represents the following equation:

Assets (Resources of the business) = Liabilities (Amounts owed) + Equity (Deficit) (net worth (positive or negative)

Assets increase or decreases as resources are bought, disposed of, become more or less valuable, or are used in the course of operations.

• Current Assets are those assets of a company that are expected to be realized in cash, sold or used during the next 12 months. These assets generally include cash, accounts receivable (ex. from patients or insurance companies), inventories (ex. healthcare products and other items you’re selling) and certain costs such as insurance, security deposits, or rent paid in advance.

• Property and Equipment are assets with a life greater than one year like computers, adjusting tables, x-ray equipment, etc. that are used in the regular operations of the business. A good rule of thumb is to expense items less than $1,000 to the income statement instead of recording as an asset.

• Accumulated Depreciation is the aggregate of charges to expense or to write-off the cost of property and equipment over its estimated useful life. It is the result of a bookkeeping entry and does not represent any current cash outlay. Under generally accepted accounting principles (GAAP), we have to expense property and equipment as it is being used. For example, if you expect a computer to last 3 years, you write 1/3 off each year to depreciation expense. Land is never depreciated.

Liabilities increase or decrease as obligations to creditors are incurred or repaid.

• Current liabilities are those obligations that are reasonably expected to be paid within one year using current assets. These liabilities generally include bank debt, accounts payable, income taxes payable and accrued expenses such as salaries, retirement plan contributions, and interest. The balance in a liability account at any given time is the amount of money the company owes. For example, the company owes Bank of North Georgia $20,000 for equipment on February 1^st and makes a payment of $1,500 on February 28^th. Of that $1,500 payment, $500 is interest and $1,000 is a reduction to the loan balance. So, the liability on the balance sheet as of 3/1 would be $19,000. If the bank wants to see a balance sheet with the current part shown separately, your accountant could figure out the next 12 months’ principal reductions and show them in a separate liability account. So, you would have two liability accounts that, if you add them up, equal the $19,000. One liability account would show up in “current liabilities” and the other would be in “long term liabilities” (below).

• Long-term liabilities are total debt less current liabilities (above) and include those obligations that are not expected to be paid within one year. Mortgages and capital leases are common long-term liabilities.

Equity increases or decreases as a result of income or loss from operations of the business (the results of the current year income statement). It also increases when owners contribute capital to the business and decreases when the capital is withdrawn from the business.

• Common Stock and Preferred Stock represent the ownership interests in a corporation. Limited liability companies (LLCs) have members’ equity, which is shown instead of stock on the balance sheet.

• Retained Earnings are the portions of all the company’s past earnings that were not distributed to the owners. If the retained earnings are negative, they’re called “accumulated deficit”.

• Total Liabilities and Stockholders’ Equity (Deficit) is always equal to total assets.

The other primary financial statements present a summary or activities over a period of time, usually a fiscal year.

The Income Statement

This is sometimes referred to as the Statement of Operations or the Profit and Loss Statement and presents a summary of activities over a period of time, usually a fiscal year. This example below represents revenues less associated expenses and the resulting net income.

Revenue (or sales) (ex. fees earned from services provided to patients or sales of products to patients)

- Cost of revenue (cost of producing goods for sale) (ex. staff salaries and cost of products actually sold to patients)

= Gross profit (measure of the profit from sales of products or services)

- Administrative expenses (general costs associated with the operation of a business) (ex. rent, office staff salaries, utilities)

= Income from operations

+/- Other income and expense (not directly related to the primary operations of the business) (ex. interest income)

- Business income taxes

= Net income (loss) (measure of the earnings performance of the company after considering all elements of income and expense)

Another term to be familiar with is EBITDA (earnings before the deduction of interest expenses, taxes, depreciation and amortization) is an approximate measure of a company's operating cash flow based on data from the company's income statement. This measure is also of interest to a company's creditors, especially bankers, since EBITDA is essentially the income that a company has free for interest payments.

The Statement of Cash Flows

This provides information about the sources and uses of cash for the period, as analyzed onto three major classifications:

	Cash provided by or used in operations
+/-	Cash provided by or used in investing activities
+/-	Cash provided by or used in financing activities
=	Net increase or decrease in cash

• Operating activities include selling products and providing services. Cash inflows include all receipts from the sale of products or services and from interest and dividend income. Cash outflows for operating activities include cash payments for the purchase of inventory, wages and benefits to employees, etc.

• Investing activities include purchasing and selling property and equipment (ex. computers and exam equipment), buying and selling stocks or bonds, and lending money and collecting on those loans (ex. usually loans to business owners).

• Financing Activities include borrowing and repaying money to owners and lenders as well as money paid to owners out of equity (profits).
  

Standards and Regulations

Generally Accepted Accounting Principles (GAAP) is a set of guidelines that provides the basis for the preparation of most financial statements. In situations where GAAP-basis statements aren’t necessary because the bank or licensing board may require something different, an OCBOA (Other Comprehensive Basis of Accounting) may be used. Common examples of OCBOA statements include income-tax-basis, cash and modified-cash-basis. Generally, OCBOA financials are less expensive than GAAP basis ones a CPA would prepare for you.

Sharon Dunn, CPA, is a financial services and audit professional. She has 25 years’ experience in public and industry accounting. She may be reached at sharondunnwright@yahoo.com.

Have You Been Yelped?

You know the saying that everyone’s a critic? It’s true. More than you may want to believe.

A recent article in Fast Company magazine told a story of a business owner who actually ended up being arrested for battery by responding to a complaint her business had received on the amateur critic site Yelp.

I’ve used the site many times to read reviews about restaurants, find gas stations, coffee shops, and other businesses. And believe it or not, the reviews have an impact on my perception of that business and whether or not I want to give my money to them. Is it right? Maybe. Maybe not. The point is that using this type of media can be a boon to your success or it can cost you dearly.

I recently did a search for Chiropractors in Atlanta to see what customers were saying.

Nothing.

Not one single review about a Chiropractor. And it’s not like the Atlanta metro area has a small population of DC’s. They’re everywhere, but still no reviews. There are four reviews about Life University.

What do you think your patients would say about you? Take a step back and think about the service you are providing your customers. How many stars would you get on Yelp? Would you be willing to encourage your patients, both active and inactive, to give your practice a review? It’s definitely throwing yourself out there, and you may not like what you read, but it does give you an incredible opportunity to improve.

Are you confident that the reviews would ALL be good, or can you make some changes to enhance the customer experience? Trust me, everyone has an opinion, and it’s up to you to create a great experience for your patients so that when they wish to express that opinion, it’s in your favor.

Take the risk. Get Yelped. If anything, it will force you to make changes to your service delivery that can only make your business better. And that’s always good.

TQM

Total Quality Management is a philosophy used in business to incorporate high levels of service and performance in all areas of the business; from marketing to finance to customer service. It has been used successfully by thousands of businesses and can create significant cost reductions, a loyal customer base, and increased margins. Things we all want right now.

A recent article in Business Week illustrates that auto giant Toyota, once the envy of quality in the industry, has gotten into serious trouble (as we’re all aware, especially if you drive one!), by scrimping too much on cost controls, leading them down a treacherous path that has hindered their ability to produce high quality vehicles.

Well then, all this setup has to come to a point about your Chiropractic office, right?

What systems have you incorporated in your practice to ensure the delivery of your services are at consistent levels of excellence? When was the last time you attended a technique seminar to brush up on your technical skills? And if you are using a technique system that incorporates multiple layers of analysis, are you using all of them?

What about staff training and team building? There is an incredible difference between a work group and a high performance team. Where is your team on that spectrum? Do you do consistent training with your team? Team huddles before every shift to strategize and create the outcomes you desire?

Getting lax on quality is now costing Toyota an estimated $155M per week. Whoa.

Take an objective look at your practice. Conduct focus groups about improvements you can make. Poll your patients in order to better serve their needs. Then take action and continuously improve.

Better retention, improved loyalty, more referrals…the envy of the industry.

You're getting too comfortable.

Early to bed, early to rise....work like hell and advertise. BJ Palmer coined that phrase and we bandy it about making it sound cool, but are we actually doing it?

Are we really working as hard as we can to communicate our message to the public? Too often I see Chiropractors get settled into the rut of comfort. The place where they see enough patients and generate enough revenue to pay their bills and live fairly comfortably. And they stop. They get comfy. They coast.

They limit themselves and their practice to mediocrity.

A good community has 15-20% of the market regularly visiting a Chiropractor. That means 80-85% of the community is subluxated. 80-85% of the community cannot function at their optimum potential. 80-85% of your community will never be as healthy as they can be.

Ouch.

Get busy.

Are You Building a Patient Base or a Tribe?

Seth Godin’s book Tribes creates an interesting discussion framed around our practices. He makes an ingenious point that tribes, whether they’re massive or miniscule, are connected around three factors: to an idea, to one another and to a leader. Which begs the question: what are you doing inside your practice to create a tribe?

A patient base is a collection of people that come into your office seeking quality Chiropractic care. They come in for their spinal analysis, get adjusted if needed, and then go their merry way, never completely understanding the full value of Chiropractic. They may or may not bring in their family (usually not!), they usually don’t refer others, and may miss an appointment here and there. They usually wind up out the door when their pain is gone, missing the point completely. They are overall satisfied with you and your service, but will not go to any great length to be an ambassador for you and your idea. The idea may or may not be there, that is, the doctor and staff may have in their minds and hearts the true essence of Chiropractic and the benefits it holds for humanity, but they haven’t taken a leadership position in their practice and lack the conviction and confidence necessary to communicate the idea to their patients and definitely have not set up systems to allow the patients to communicate with each other about the idea.

A practice that creates a tribe looks different. In it, the doctor and staff are committed to educating their patients every chance they get about the BIG IDEA that is Chiropractic. They create a shared vision that their patients can connect to and then they leverage that connection to build their tribe. Imagine that your patients are actively creating new patients for your practice by bringing in their family and friends. Continuously. They are followers of a tremendous leader (you!) instilled with an idea that is bigger than anything, and are connected to one another with a vision that transforms lives. Patients that come early with their entire family, that pay ahead of time, that bring others to your health class (you better be doing one!) regularly, that communicate with others the wonders of Chiropractic and the service that you provide them. That’s a tribe, and it’s something you can create.

Bottom line…An idea. A leader. One another. Put all three together and watch your practice explode!

Recession & Outlook for the Chiropractic Industry

So, let’s get the bad news out of the way. The current economic recession has eliminated 6.8 million jobs since it began in December 2007. Households’ disposable income (money people can spend freely) and savings have shrunk, generally forcing everyone to spend less. On top of that, leaders in the U.S. government are strongly pushing for healthcare reform…who knows what outcome that will have for the already strained chiropractic industry?

Need more bad news? While it’s hard to get a roomful of economists to agree, more and more are warning of a double-dip recession, a brief period of recovery and growth, followed immediately by another recession such as we have now. Just one argument for the double-dipper…Fitch Ratings expects adjustable-rate mortgages (the ones with the low teaser rates for the first few years, then the rates increase to match market rates each year) totaling about $96 billion to suffer increasing interest rates in 2009 and 2010-the average home’s monthly payment will increase 63%. The question is – how will the homeowners be able to make their higher monthly payments? They’ll definitely reduce other spending, causing lower revenues and more layoffs, perpetuating the vicious cycle in the U.S.

We have all seen, whether you’re reading it in the news or seeing it firsthand in your practice, that people are spending less. According to IBIS World, Inc, the economic outlook for the chiropractic industry isn’t very good.

IBIS’ predictions:
• Revenue drop of 2% for 2009 and less than 1% annual growth per year for 2010 through 2014. In fact, we won’t even be back to the 2007 industry revenue figure of $13.3 billion until at least 2015.
• Profitability will fall due to the drop in revenue and increased competition. IBIS expects DCs to cut fees to lure patients, forcing others to do the same.
• Wages and employment opportunities follow revenue. Wages, payroll taxes, and benefits costs, like health insurance, make up the largest slice of a chiropractic practice’s expenses.

You probably already know that the American Chiropractic Association has reported that some managed care networks are restricting or denying care. Not good news when you consider that about 43% of chiropractic patients pay for treatment using their employer-provided insurance. Premiums employers are paying increase by double-digit percentages each year. In fact, Commonwealth Fund, a non-partisan, non-profit group survey released in August 2009 found that the amounts employers pay for family coverage increased by 119% from 1999 to 2008. Employees typically pay in about 30% of those premiums, so our costs are skyrocketing. We are paying more for the same coverage each year – but is it the same?

You’re probably asking, “Does she have any good news?” Well, we’re getting older. The Census Bureau predicts that we will have about 10 million more Americans in the 45+ age group in 2013. Very good news since the National Board of Chiropractic Examiners’ recent survey says 34% of chiropractic patients are at least 51 years old. Thought you’d love to help people prevent back pain and other issues when they’re older, the fact is, most wait ‘til the pain is a daily occurrence.

A growing number of American patients are trying medical alternatives to drugs and surgery. With rising costs and the advent of high-deductible and other expensive health plans, who wouldn’t be?

You can significantly improve your own outlook by educating the public, especially patients, and leveraging new technology that will improve their experience. DCs have to make the most of every opportunity to demonstrate highly specialized knowledge and training, build relationships with patients, and ask for referrals. You can’t compete for very long with price cutting. There isn’t going to be a government bailout. Wall Street isn’t going to ride to the rescue. DCs have to do the little things right every day and provide the best care, including education, to patients. They have to clearly see the value you provide every day!

Tune in next month…bank loans are harder to get but leases aren’t. We’ll talk about leasing versus buying and the different types of bank loans.

Jennifer Birtz, CPA, CIA, CFE, is a Senior Manager at Habif, Arogeti & Wynne, LLP, a fully integrated financial services firm in Atlanta, GA. She can be reached at Jennifer.Birtz@hawcpa.com.