Understanding your income statement and balance sheet
Each month you are likely sent an income statement. An income statement shows you your practice’s revenues, costs and expenses over a predetermined period, so in the case of your monthly income statement it’ll show those over a period of one month.
The information presented in an income statement is important because it helps you identify items that may be diminishing your profitability. For example you can pinpoint if expenses for specific items have got out of control (ie. supplies) or if your monthly production has decreased over a period of time. This type of information can be used to make proactive decisions to improve your operations and to help you maintain or reach your desired profitability target.
What does an income statement not show?
Many think that everything is accounted for on an income statement, however that’s not actually true. For starters, they don’t include shareholder loans. Chances are you pay yourself through withdrawals when you choose to – maybe this month you needed $5,000 for the downpayment on a new car or $3,000 for your son’s tuition – as a corporation you simply withdraw this amount as a personal payment. This is called a shareholder loan, and shareholder loans show up on your balance sheet and not your income statement because they are considered a liability.
The second thing that does not show up on an income statement are capital expenses. Capital expenses are big one-time expenses such as purchasing a new drill or chair. As a general rule, capital purchases are considered to be anything valued at $500 or more and has a lifespan of over one year. So unlike a dental chair that will hopefully last you longer than a year, purchasing $1,000 worth of gloves because there was a sale does not count as a capital expense. There is one exception to this rule, and that is that a capital expense could show up on your income statement as an “amortization,” which would be a small chunk of the total value divided over the period of time it is intended to last.
How does this work? Let’s say you purchase a $10,000 dental chair that is estimated to last 10 years. Your accountant will break that down into a yearly payment of $1,000, which will show on the income statement for every year that it is active until the full expense is paid off.
What is a balance sheet?
As we mentioned, shareholder loans and capital expenses show up on your balance sheet not your income statement – so what exactly is a balance sheet? A balance sheet shows your practice’s assets, liabilities, and shareholders’ equity. It provides a longer-term more broad view of your operations – what’s coming in, what’s going out and what’s being used where. This is in contrast to an income statement which gives you a quick snapshot of what is happening on the ground floor – what money is leaving (expenses and costs) and what money is coming in the door (revenue). You should use your balance sheet to review items such as: the equipment account to make sure it reflects any additional equipment purchased during the year, the share holder loan account to verify if all withdrawals are correct and the A/R balance to ensure it ties back to your patient management system.
What do I do when I get one of these?
When you receive an income statement or balance sheet from your accountant, make sure to give it a look over and make note of anything that you think should be there but doesn’t appear to be. Reviewing both of these documents is good practice and will help you get to know the financial side of your business better. Tracking the key metrics for your practice (ie. productivity, profitability, A/R and cash) will help you keep a close eye on how you are doing throughout the year and will keep you on the right path for reaching your targets for the year.