By Bob Main, ABOM

This two-part series shows you how to really use your statements to improve your bottom line

Many practices and businesses have financial statements, but very few understand how important they are to the operation�s success. When some owners or doctors receive their financial statements, they look at the top line (how much revenue they think they took in) and the bottom line (how much profit they think they made).

However, those owners who are passionate about their financial statements will underline, highlight, and make notes in the margins. After they read and analyze their statements, they have a clear picture of where they are financially and develop a plan to make it better each and every month.

Does that describe you? If not, here is a step-by-step plan to make financial statements something you utilize and embrace.

STEP 1: USE AN EXPERT

Many business owners/doctors try to take the �low cost� cousin Fred or spouse approach to getting financial statements completed. To get quality statements that bring valuable financial information to the practice, use someone who stays up-to-date on accounting practices and the ever-changing tax laws. Look for an experienced accountant or CPA to prepare a monthly package of financial information that might include a balance sheet, income statement (P&L), and cash flow statement.

This is not to say that you or someone in the office shouldn�t be responsible for paying bills or writing checks. You don�t need a CPA or accountant to do that.

 � Code checks. However, it is a good idea to code each check as to what expense category the expense is for (payroll, office expense, etc). Work with the accountant to determine what the expense categories should be and a short definition as to what type of expense should be included in each category. That will avoid confusion and mis-categorizing expenses. You can even use a small business program, such as Quick Books, to write checks and record revenue.

� Develop reports. Then you can develop reports and send the

information to the accountant at the end of each month. It will be tempting to use the Financial Statement reporting part of the Quick Books program; but resist! Only a qualified accountant can really determine things such as depreciation, amortization, and tax-related entries.

STEP 2: EXPECT TIMELY COMPLETION

When you look for an accountant, determine up front how long it will take to get the financial statements back to you.

� Use the 30-day rule.

The general rule of thumb is that it should take no longer than 30 days to get the reports to you after you close out your books and get the expense and revenue information to him/her (two weeks is better). If it takes longer than that, it is usually too late or is a lot more expensive to fix a problem by the time you discover it in the financial statements.

� Determine cut-off. Pick a

cut-off date�the final date to record revenue, discounts, and expenses�at the end of the month. Discuss the best method of picking a date with your accountant. It may not always be the last calendar day of the month.

Anything after that date will go into the next month (or year if it is end of the year). It will take you or your staff a few days to finalize the financial information after the cut-off date. Then get the information to your accountant as quickly as possible.

STEP 3: LEARN TO INTERPRET

If you are not familiar with the various elements of financial statements, there are several ways to get educated. The first rule is don�t get frustrated with the learning process. It can take a while to really understand all elements. The good news is that you will only need to have the basics down to really start realizing the benefits of a financial statement. Below are some ways you can get educated on how to read them.

� Take classes. Look for a local college with courses on basic business, and ask the guidance counselor what classes will help you learn how to read financial statements. Another option is one-day classes offered by traveling  training companies such as Skill Path, www.skillpath.com. A third source is classes at one of the ophthalmic conventions or meetings that have a good educational program. The larger regional or national meetings has good seminars on financial topics.

� Read up. Visit your public library or online book company. There are many excellent books on how to read and understand financial statements.

� See an accountant. Sit with your accountant monthly and ask him/her to spend an hour a month to help you understand the various aspects of the statement. It might cost you a few extra bucks, but it will be worth the investment.

� Call a friend. Ask a friend who runs a business to sit with you for a few hours to give you the basics of

a financial statement.

� Hire a consultant. To really get the knowledge necessary to not only understand financial statements, but to also learn how to interpret the data, call in a consultant who specializes in the optical industry. One benefit: he or she should be able to tell you how your numbers compare to national averages of similar-size practices.

STEP 4: BENCHMARK YOUR RESULTS

Compare the key aspects of your financial results�such as cost of goods, payroll, overhead expenses, and discounts�with national averages of practices of similar size.

There are several sources for this type of information.

� Join a group. Become a member of an �information sharing group� of optometrists or opticians that are of similar size practices. Then get together on a regular basis to share and compare financial information and discuss topics relating to each member�s practice. Practices are located in areas that don�t compete with each other and all must sign non-disclosure agreements. You can find these groups through your national or state associations.

� Ask vendors. Ask your lab or local lens representative. If they are in tune with their markets, they will have this kind of information or will have access to it.

For some examples of benchmark numbers, see the sidebar below.

STEP 5: PREPARE A BUDGET

Doing a budget sounds about as exciting as watching a beadpan warm up. However, if done properly, the process can be fun and exciting. Running a practice or business without a budget is truly �flying blind.�

To start the process:

� Trend your business. Look at trends in the key ratios for your practice/business for the past several years. The key here is what your practice trends are, not necessarily other practices� ratio numbers. (See the Key Ratios sidebar on p. 70 for several examples).

� Develop a plan. Ask yourself: what do you plan to do to improve key ratios? Increase revenue by adding a new piece of equipment? Lower cost of sales by reducing remakes or by adding a line of frames that has a higher profit margin?

� Analyze third party. Consider how changes in managed care plans affect your revenue and bottom line.

� Analyze your market. What is the economic climate and forecast for your area? Will it affect your practice?

STEP 6: WRITE A PLAN

Review the revenue and expense trends for your practice, determine how they will improve (or not) in the coming year, and then develop a written plan on how you will affect each of these key ratios.

That should give you some forecasting guidelines and be a good start to your budgeting process.

STEP 7: FORECAST REVENUE AND EXPENSES

Do it month-by-month for the next 12 months, and don�t forget to factor in seasonality trends.

Then do annualized projections for the next two to five years. This will help build a long-term view of how to grow your business.

Additionally, if you plan to borrow money or lease equipment in the coming year, the lenders will want these projections.

STEP 8: WRITE PRACTICE GOALS

Finally, have a written set of practice goals. These are the things you would like to accomplish in the next one to 10 years.

These goals should be aligned with your short- and long-term budgets. Most practice goals cannot be accomplished without making sure the budget supports the goals.

Don�t miss Part II of this series in next month�s issue! 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.