Heeren S. Makanji, MD, and Louis G. Jenis, MD, published an article in Clinical Spine Surgery explaining the different types of financial statements physicians receive when they own their own practices.
The article, titled "Understanding Financial Statements in Clinical Practice: A Primer" examines balance sheets, income statements and cash flow statements. Here are the key points examined in each one:
1. Balance sheet. "The balance sheet provides a snapshot of a business's financial position at any given time and is usually prepared on a monthly, quarterly and semiannual basis depending on the company," according to the article. Taken together, balance sheets are designed to give owners a picture of their overall business based on the increase or decrease in equity.
The sections in a balance sheet include assets, liabilities and owner's equity, and can be further broken down to include:
• Current assets
• Cash securities
• Accounts receivable
• Inventory
• Fixed assets
The current assets can include cash on hand and A/R while fixed assets includes imaging equipment, surgical equipment and other physical property. The liabilities section can highlight money the practice owes to suppliers, salaries or loans. The owner's equity includes retained earnings, or net profits, and contributed capital.
Physician owners can use the balance sheet to examine their investments; if assets bring value or extra revenue, any loans taken to pay for it can be re-paid; if not, the owners' investment may completely disappear but the loan must still be paid.
2. Income statement. "The income statement shows cumulative results of a business over a set time period typically a quarter or a year," according to the article. The income statement includes the revenue from insurance companies and potentially ancillary service lines as well as operating, depreciation and income expenses and taxes. Owners can see whether their business is making a profit or not.
Smaller practices use one report for the entire group while larger practices may split the income statement by department and include incentives to increase performance. The practice's surgeon compensation structure and insurance company contracts will affect the income statement.
3. Cash flow statement. The cash flow statement includes operating, investing and financing activities. Operating activities might be cash generated minus cash put in, with the cash being put back in typically as inventory. The investing activities outline the cash from fixed asset sales and that spent on new asset acquisition. Financing activities covers the cash that paid debt or dividend and the cash the practice obtains by "giving out loans or stock."
The net profit in the income statement and amount of cash investors see might be different, and the cash flow statement can fill that gap. Practices want to see a positive cash flow to be prepared for unexpected bills and expenses.