The Final Steps:

How to Use Financial Statements

 

 

The second part of this series makes  an even dozen steps to success with financial statements

 

 

By Bob Main

 

 

The second part of a two-part series on �How to Use Financial Statements to Improve Your Bottom-line,� shows that knowing,

understanding, and controlling the financial aspects of your business

or practice are critical components to realizing success.

The final three of the dozen tips presented in this series can help you finalize your plans to get a handle on financial statements.

 

 

Step 9:

Allocate time to review the financial statement

 

If you are like most practitioners and business people, there are just not enough hours in the day to get everything accomplished. Many people develop To Do lists or purchase fancy time management software programs and planners, but still come up short on time.

 

Unfortunately, one important action item that often gets put on the back burner is taking time to thoroughly review the financial statements. Most people give them a quick glance and put them on the To Do pile. Of course, that pile already contains the last three months of unread financial statements.

 

Most successful business people actually schedule time each month to review their financial statements. Do as they do and block out two to three hours each month in your schedule to review your financial statements.

 

Tell the receptionist (or other staff members who do your scheduling) that you are �out of office� for two or three hours shortly after you anticipate getting the financial statements.

 

During this time:

 

� Close the door and do not take phone calls.

 

� Review the financial statements and make notes, highlighting the sections that you determine to need investigation. Make a list of questions or areas of concern.

 

� During that same blocked out time, schedule a chat with your accountant. You will come across questions while reviewing the financial statements, so it is a good time to talk to your accountant while it is fresh in your mind.

 

Step 10:

Review, analyze, and re-budget monthly; and develop an action plan

 

In part one, we discussed the importance of writing a budget, forecasting revenue and expenses, and writing a plan on how to improve your financial results. Studies show that only 21 percent of all practices actually take the time to create a written annual budget and 47 percent don�t even define annual revenue goals. Having a budget is as important as having a rudder on a ship. Take the time to do a budget.

 

If your practice/business does have an annual budget, take the monthly financial information and compare it to

the budget:

 

1) Are the current monthly revenues and expenses aligned with the budget? If not�why not?

 

2) What is causing the revenue to be lower than anticipated? Why are the expenses different than what you anticipated when you developed the budget? Now is the time to analyze what has changed.

 

3) Develop an action plan to gain control over and change those financial results that are different than your budget.

 

Now comes the hard part. If revenue is lower than anticipated in the budget, then you will need to either re-forecast or re-budget expenses. Until revenue is restored to the levels anticipated in the budget, expenses will need to be trimmed.

 

Unless you are comfortable with operating for a bottom line profit that is less than targeted, either revenue will need to be increased or expenses need to be reduced. It�s pretty simple math.

 

This is the beautiful thing about re-forecasting each month. It gives the business owner a chance to get financially realigned and not just operate financially blind.

 

 

Step 11:

Share the results and the process with the staff and others in the practice

 

For some reason, doctors and business owners do not like to share any financial information about the practice or the business with any of the managers or staff.

 

Perhaps there is a concern that some employees would share the financial information with someone outside of the business. Or perhaps they are concerned that the information would be given to the competition. However, the people who work in the practice, such as the techs or opticians, have a direct effect on the financial success of the organization.

 

This is not to say that you should give a complete copy of the budget or P&L statement to the staff. However, the team does need to be involved in three ways:

 

� Include the manager(s) and staff members in the budgeting process. Educate them on the importance of this process and let them have a stake in developing the budget numbers. That way, they are more likely to help deliver the numbers.

 

� Give them monthly feedback on how the practice is doing. Just pick general categories to report. Instead of giving total dollar revenue, say, �We are 3 percent below budget.�

 

Other categories that are good to report on are:

Percent of payroll

 

Cost of remakes and redos

 

Percent of second pair sales

 

Percent of lens treatments revenues

 

All of the numbers cited above should be reported as actual results compared to the  budget. If the staff helped develop the budget, they will feel compelled to help develop a plan to get back on track if the results are less than the budget.

 

� Celebrate with the staff. Enjoy the success when actual vs. budget is on or above target. Sometimes a simple pizza party or bowling night out is a good way to say thank you to the staff for helping keep the financial targets and actual results aligned.

 

Step 12:

Don�t get overwhelmed with financial information. Only focus on a few key areas at a time

 

As so often happens, once people become aware of the line-by-line financial aspects of their practice or business, they tend to get overwhelmed. Questions bombard them. Where do I start? How do I address all of these financial issues? But don�t try to take on the world right away.

 

 Select only five key areas at a time that you would most like to change/improve. Some of the areas that need attention in most practices are:

 

 Payroll and productivity. Revenue generated per full-time employee.

 

Discounts. You�ll need to review managed care plans the practice accepts.

 

Cost of goods. Pinpoint how frames are priced or out of control eyeglass remakes.

 

Training and development expenses. It�s usually too low! Are you investing in your staff?

 

Marketing. Including recalls, referral programs, newsletters, website development, etc.

 

Lenses/treatments. AR, high index, etc.

 

Set a goal and develop a written plan with timelines on how to improve these five areas.

 

Get the staff involved in the process. Set goals for them.

 

Measure, monitor, and communicate the results. Don�t forget to celebrate the success. EB

 

Industry veteran Bob Main, ABOM, is president of Professional Optical Concepts, a consulting

firm specializing in the ophthalmic industry. Contact him via e-mail at bobmain@opticalconsulting.net.

 

Glossary

Accounting Terminology

 

Accounts Payable:

The record of the money owed to outside sources for current expenses (lab bills, frames purchased, rent, etc.).

 

Accounts Receivable:

The money owed by patients for purchases. If the patient pays cash, then there is no accounts receivable for that patient. However, if you are billing a managed care plan for  that patient, then that amount goes on the accounts receivable.

 

Accrual Accounting:

The system of accounting where revenue is booked when earned and expenses are booked when paid. 

 

Asset:

Items in the business� possession (tangible and intangible) which have value, such as cash, inventory, and accounts receivable.

 

Balance Sheet:

The financial statement showing the value of the business. The balance sheet shows assets (what the business owns), liabilities (what the firm owes), and owner�s equity (assets minus liabilities, or what the firm is worth).

 

Cash Accounting:

The system of accounting where revenue is booked when cash is collected, and expenses are booked when cash is paid. 

 

Cash Flow Statement:

The financial statement that shows the sources and disbursements of cash. This is a good way to determine if you will have enough money to pay the bills each month or if you need to get a line of credit.

 

Chart of Accounts:

The chart of accounts lists all of the categories used to track assets, liabilities,

equity, revenue, and expenses in an accounting system.

 

Cost of Goods Sold:

Simply, the cost to the business of the goods the business sells (lab bills, cost of frames, etc.). If the business owns a lab, it will include cost of inventory, equipment, machinery, labor, etc.

 

Debits/Credits:

The system accountants use to track accounts. Basically, every transaction debits one account and credits another (double-entry accounting). For example, when a patient pays a bill, the accountant debits cash and credits A/R.

 

Equity:

The financial value of the business to

its owners.

 

Gross Margin:

Net revenue minus cost of goods sold: the amount available to pay for labor, overhead, and net profit.

 

Gross Revenue:

Total sales, before discounts, returns, and adjustments.

 

Income Statement:

The financial statement showing the business� total net profit for a given period. Also called profit and loss statement or P&L.

 

Inventory Value:

The value of Inventory, as calculated using the books. Beginning inventory plus

purchases minus cost of goods sold equals the inventory value.

 

Liability:

Funds that the business owes to banks, vendors, etc. Debts of the business.

 

Net Profit:

The total profit generated by the business for a given period. Different from net cash flow, in that it includes non-operating expenses and non-cash expenses.

 

Net Revenue:

Total sales, less discounts and adjustments.

 

Physical Inventory:

The actual value of Inventory, determined by physically counting it.