Reading financial statements is a crucial part of understanding any medical practice’s finances. Financial statements can be considered as a type of map for medical practices. They provide an idea of the financial landscape and some possible routes, but you must understand them to choose the path that makes sense for your goals.
Throughout this article, we’ll explore how financial statements for medical sources differ from regular businesses, outline some of the most common financial statements for medical practices, and describe how they will help you in your medical practice’s journey.
How are Financial Statements for Medical Practices Different?
There are a couple of key differences to keep in mind for the financial statements of medical practices.
1. Revenue sources
Medical practices are unique due to their complex combination of income streams:
- Private insurance reimbursements often add significant complexity, each with different reimbursement rates, coverage limitations, and claim procedures.
- Government-backed programs such as Medicare and Medicaid involve compliance with specific regulations and guidelines, including coding requirements and eligibility criteria, which adds administrative overhead.
- Patient payments require navigating the world of deductibles, co-pays, and multiple insurance plans. A degree of client education to prevent costly mistakes and back-and-forth is often required.
2. Expense structure
In addition to regular expenses such as personnel salaries and utilities, medical practices have unique expenses to consider including:
- Procurement of specialized medical supplies
- Equipment maintenance
- Investments in technology for maintaining health records
- Maintaining stringent compliance, spanning regulatory requirements and quality assurance measures
Which Accounting Method Are You Using?
All businesses, including medical practices, must choose the accounting method that fits their industry and needs.
- Accrual accounting involves recognizing revenue and expenses when they are incurred, regardless of the actual cash flow. For instance, revenue from services is recorded when the service is provided, even if the payment is received at a later date. This offers a more accurate representation of financial performance but requires meticulous tracking of receivables and payables.
- Cash-basis accounting revolves around recording transactions only when cash is exchanged. It’s a simpler method, recognizing revenue when payments are received and expenses when bills are paid. However, this method might not reflect the practice’s true financial position accurately, especially if there are delays in payment collections or outstanding bills. While easier to implement and understand, cash-basis accounting might not provide a comprehensive overview of the practice’s financial standing.
What to Look for on Financial Statements for Medical Practices?
The Balance Sheet
The Balance Sheet presents a snapshot of a medical practice’s financial standing at a specific point in time. For doctors and other medical practices, this statement helps gauge liquidity, assets’ long-term value, and the extent of financial obligations. Here are some insights offered from the balance sheet:
- Current Assets: These are assets expected to be converted into cash or used within a year, such as cash, accounts receivable, and inventory.
- Fixed Assets: Long-term possessions including equipment, property, and facilities.
- Current Liabilities: Debts and obligations due within a year, including accounts payable, accrued expenses, and short-term loans.
- Long-Term Liabilities: Debts and obligations payable over an extended period, like mortgages or long-term loans.
- Owner’s Equity: The residual interest in the practice’s assets after deducting liabilities, representing the owner’s investment and retained earnings.
The Income Statement
The Income Statement provides a summary of a medical practice’s revenues, expenses, and overall profitability over a specific period. For medical practices, this statement is crucial in understanding generated revenue, costs incurred in running the practice, and the resulting net income or loss. Income statements include:
- Revenue: The total income generated from services and products provided by the practice
- Expenses: Various costs incurred in running the practice, such as salaries, medical supplies, rent, and administrative expenses.
- Net Income: Calculated by subtracting total expenses from total revenue, this figure indicates the practice’s overall profitability for the period. If expenses exceed revenue, it reflects a net loss, while a positive value signifies a net profit.
The Statement of Cash Flows
The Statement of Cash Flows tells a business how money moves in and out during a specific time. It’s like a bank statement for the practice, showing where the cash comes from and where it goes. You’ll become familiar with:
- Operating Activities: Day-to-day money movements, like cash from patient payments or payments for supplies and salaries.
- Investing Activities: Cash related to investments in the practice, such as buying or selling equipment.
- Financing Activities: Reflects cash from borrowing or paying back loans, as well as money from investors or owners into the practice.
Putting Financial Statements for Medical Practices Together
Together, your financial statements provide a picture of your medical practice’s past, present, and future. To make smart decisions, medical practices need to decipher this map correctly.
Sorenson and Company, CPA helps medical practices build and interpret their financial statements, choosing the best routes towards their financial goals.
Let us be your guides, contact us today!