the statement most people focus on is the income statement. this report shows the amount of income less expenses to arrive at net income. this is the bottom line of the business. a good statement would have the following columns: current month, last year current month, year to date, and last year to date. this way you can compare the current and year to date results with the same results from previous years. by reviewing it this way, it will help you identify any trends. for instance, in the following table, the revenue has dropped while wages have increased. once you know that, the next questions are “Why?” and “how do we manage the line better?” Income Statement 12 months ended 12 months ended 12/31/2012 12/31/2011 revenue . . . . . . . . . . . . . . . . . . . . . . . 5000. . . . . . . 6000 Wages . . . . . . . . . . . . . . . . . . . . . . . . . 1400. . . . . . . 1000 sales and general expense . . . . . . . 1500. . . . . . . 1600 depreciation . . . . . . . . . . . . . . . . . . . . . 500 . . . . . . . . 500 total operating expense . . . . . . . . 3400 . . . . . . . 3100 operating income. . . . . . . . . . . . . . . . 1600. . . . . . . 2900 taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 100. . . . . . . . 100 Net Income . . . . . . . . . . . . . . . . . . . 1500. . . . . . . 2800 the income statement is not always a true picture of how you are spending your money. You might have a bank loan you are paying. the payments on the principle go against the bank loan, which is reported on the balance sheet but not the income statements. therefore, your income statement could show that you are making money despite your depleting cash balance. the third statement is the statement of cash flow. this statement contains three sections. the first section is cash flow from operations which will show the amount of cash either generated or used from running your business. if this area is continually negative, meaning the business is not generating enough cash to run the operations, the business is probably in trouble. the next section is cash flow for investing, which lists items that you have purchased but which are not included in operations. it could include fixed assets or investing in other companies. the last section is cash flow from financing, which reports loan activity. a healthy company might have cash flow from operations positive, investing negative, and financing negative, as in the example below. this would tell me the company is making money and using the cash to invest in new equipment while paying down debt. not all companies operate this way, so by looking at this report monthly you should be able to see trends and ask why and how to better manage the process. FEATURE storY Statement of Cash Flow (Indirect Method) 12/31/2012 12/31/2011 Operating Cash Flow net income . . . . . . . . . . . . . . . . . . . . 1500. . . . . . . . 2800 add noncash expense depreciation . . . . . . . . . . . . . . . . . . 500 . . . . . . . . . 500 increase/decrease in assets and liabilities acct receivable. . . . . . . . . . . . . . . –500 . . . . . . –4500 inventory . . . . . . . . . . . . . . . . . . . . –100. . . . . . . . –400 Payables . . . . . . . . . . . . . . . . . . . . . 500. . . . . . . . 1500 Total Operating Cash Flow. . . . . . 1900. . . . . . . . –100 Investing Cash Flow Purchase equipment . . . . . . . . . . . . –500 . . . . . . –4500 Total Investing Cash Flow . . . . . . –500. . . . . . . –4500 Financing Cash Flow Proceeds from long term debt. . . . –500. . . . . . . . 4000 Proceeds from issue of equity security . . . . . . . . . . 5000 Total Financing Cash Flow. . . . . . –500. . . . . . . . 9000 net cash flow for Period . . . . . . . . . . 900. . . . . . . . 4400 beginning cash. . . . . . . . . . . . . . . . . 4400 . . . . . . . . . . . 0 Ending Cash . . . . . . . . . . . . . . . . . 5300. . . . . . . . 4400 those are the basic financial statements. looking at all three, you should be able to get a good idea of the health of a company. there are also a variety of key performance indicators (KPis), which should be carefully studied. KPis are those items that are vital to business profitability. they could include factors such as days of revenue, collection percentage, number of patient visits, number of new patients, and number of a certain cPt code. a computer program probably will not calculate these, so you may have to set up a simple spreadsheet that calculates them. the financial program you are using should not just be to make the accountant’s job easier at tax time. it should be used as a tool to help you manage the business and identify problems or opportunities. if you are not using the information for this, then you are missing out. as the old saying goes, “if you can measure it, you can manage it.” financial statements should be the tool to help you measure and manage your business. Michael Farmer, CPA, CHBC, has been a CPA working with medical clients since 1997. He helps his clients with their accounting, tax, and business needs. In 2010, he earned his healthcare business consultant certification. Michael resides in Muskegon Michigan, where he is a partner in a CPA firm. the journal of the healthcare billing and management association 27
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