Related Sites:     ISRS   |   AAOE   |   EyeSmart   |   EyeCare America   |   Academy Foundation   |   EyeWiki
Find an Eye M.D.     About     Newsroom     Help
Young Ophthalmologists
Accounting Statements for Ophthalmology Practices

MoreIssue Index | Related Articles

In this article, I will review some accounting principles and accounting statements that are useful for assessing the financial state of your ophthalmology practice. I will also review aspects of more traditional accounting and the reports that define the performance and financial condition of the “business” of your practice.

Deciding to use cash or accrual accounting is a topic that often generates debate between practice managers and accountants.

In cash accounting, income is recognized when it is received and expenses are recognized when they are paid.

In accrual accounting, income is recognized when it is earned and expenses are recognized when they are incurred.

For any medical practice, the major difference between cash accounting and accrual accounting is on the income side. In an accrual system, income is recognized when the clinical service is rendered. The value of the service is generally represented by the gross charges, which are then adjusted to the expected income. The inability to accurately predict the exact payment level from each insurer is the major factor that makes accrual accounting so difficult for medical practices to estimate.

In practices that are large enough to employ an accounting professional to keep the books, the accrual system is often used, with an adjustment to gross charges based on the collection ratio from the previous year. The flaw with this system is that there are not always accurate measurements to determine if the previous year's collections are optimal. For this reason, I recommend that most practices use the cash accounting method.

Financial Statements
There is no shortage of financial statements that accountants use to define a business. We will concentrate on four that I find the most useful. These are an income statement, a budget, a cash flow statement and a balance sheet.

In simple terms, an income statement is a report of the financial history of a business over a defined period. A balance sheet, on the other hand, is a snapshot of the financial status of the business at a moment in time. A budget is simply a projection or prediction of what the income statement will look like at some future point in time.

Income Statement
The income statement, sometimes called a statement of income and expenses, is a fairly straightforward report, with the top section of the report listing income by various categories, adjustments to the income (refunds, etc.) and the adjusted income.

The next section of the income statement lists expenses by category. These categories are generally defined by the practice’s general ledger categories. Whether the books are kept by hand or in a simple or complex accounting computer software package, expenses are sorted into categories that even a simple software program such as Quicken can track.

The format can be as simple as:

1/1/04 - 6/30/04

 

 

INCOME

 

 

Fee Income

$1,000,000

 

Refunds

($350)

 

NET FEE INCOME

 

$999,650

EXPENSES

 

 

Non-Physician Staff

$259,909

 

Office Occupancy

 

 

  Rent

$54,981

 

  Utilities

$14,656

 

  Maintenance

$12,550

 

Total Office Occupancy

$82,187

 

Malpractice Insurance

$18,500

 

Office Supplies

$546

 

Legal and Accounting

$2,245

 

Miscellaneous Expenses

$139,063

 

TOTAL EXPENSES

 

$502,450

NET INCOME

 

$497,200

PHYSICIAN SALARY

 

$400,000

PROFIT/LOSS

 

$97,200

Note that this example is quite oversimplified. Your income statement would have a far more discrete set of expense categories, rather than $139,063 in “miscellaneous” expenses. The value in quarterly monitoring of the income statement is to assure that the total non-physician expenses (measured as a percentage of income) remains at an acceptable level compared both to previous quarters and national norms. It is also a way of comparing the actual income and expenses to the projections or the budget.

Budgeting
The income statement depicted above is a report of financial activity for the period Jan. 1, 2004 through June 30, 2004. Had budgeting taken place in December 2003, a projection of each “line item” in the income statement would have been entered. A similar income statement report with actual activity compared to budget would be as follows:

 

ACTUAL

BUDGET

VARIANCE

INCOME

 

 

 

Fee Income

$1,000,000

 

 

Refunds

($350)

 

 

NET FEE INCOME

$999,650

$950,000

$49,650

EXPENSES

 

 

 

Non-Physician Staff

$259,909

$256,500

-$3,409

Office Occupancy

 

 

 

  Rent

$54,981

 

 

  Utilities

$14,656

 

 

  Maintenance

$12,550

 

 

Total Office Occupancy

$82,187

$80,000

$2,187

Malpractice Insurance

$18,500

$18,500

$0

Office Supplies

$546

$400

$146

Legal and Accounting

$2,245

$3,000

-$755

Miscellaneous Expenses

$139,063

$131,600

$7,463

TOTAL EXPENSES

$502,450

$490,000

$12,450

NET INCOME

$497,200

$460,000

$37,200

PHYSICIAN SALARY

$400,00

$400,00

$0

PROFIT/LOSS

$97,200

$60,000

$37,200

As illustrated by this statement, while the actual practice profit was $97,200, only $60,000 profit was projected in the budget, leaving $37,200 in profit above the budgeted amount.

I recommend that a budget be developed annually and monitored against actual performance. These projections are invaluable in making strategic financial decisions for the practice, including expanding services, adding a new provider or opening an additional office.

Cash Flow Statement
The cash flow statement is subtly different from that of the income statement. While the income statement reports on income received and expenses paid, the cash flow statement adds the beginning and ending cash balances. This report describes the liquidity of the business. A simplified example follows:

Opening Cash Balance

$75,000

 

Income Received

$150,000

 

TOTAL CASH

 

$225,000

Expenses Paid

$125,000

 

Ending Cash Balance

 

$100,000

The above data illustrates positive cash flow, or an increase in the available cash at the end of the month, as compared to the beginning of the month. If the expenses for the month exceeded the opening cash balance and the income, the report would reflect a negative cash flow, as illustrated below.

Opening Cash Balance

$75,500

 

Income Received

$80,000

 

TOTAL CASH

 

$155,000

Expenses Paid

$145,000

 

Ending Cash Balance

 

$10,000

Continuing months of negative cash flow will eventually leave the practice with insufficient cash to pay its expenses.

Balance Sheet
While the income statement presents a picture of financial activity over a period of time, the balance sheet is a snapshot of the financial status of the business at one point in time. Here is a listing of various categories of assets and liabilities:

Category

Comments

Example $

 

Assets

 

 

 

  Current Assets

 

 

 

    Cash

Bank accounts, petty cash

$45,000

 

    Prepaid Expenses

Malpractice premiums, taxes, etc.

$1,450

 

    Inventory of Supplies

Supplies on hand

$3,500

 

    Accounts Receivable

Calculation of expected recovery

$110,000

 

 Property and Equipment

 

 

 

    Real Estate

Land, buildings

$0

 

    Leasehold Improvements

Applies if office space is leased

$23,000

 

    Medical and Office Equipment

Net of depreciation or based on replacement value

$95,000

 

TOTAL ASSETS

 

 

$277,950

Liabilities

 

 

 

  Current Liabilities

 

 

 

     Accounts Payable

Bills due to be paid

$17,500

 

     Refunds Due to Patients

Correction of overpayments, etc.

$0

 

     Bonuses/Commissions Due

To optician, LASIK coordinator, etc.

$2,700

 

     Prepaid Patient Fees

LASIK fees, etc.

$4,000

 

     Payroll Taxes Due

Quarterly payment (should be offset by the bank)

$1,675

 

     Billing Fees Due

Fee due to billing service on collections already received

$4,300

 

     Employee Salaries Due

 

$12,500

 

TOTAL LIABILITIES

 

 

$42,675

Owner's Equity

 

 

 

     Contributed Capital at Start-Up

 

$25,000

 

     Retained Earnings

Usually distributed at the end of each year

$210,275

 

TOTAL OWNER'S EQUITY

 

 

$235,275

TOTAL LIABILITIES & OWNER'S EQUITY

 

 

$277,950

With a balance sheet, the sum of liabilities and owners’ equity must always equal the total assets. There is always a claim against the assets, whether from creditors or owners of the organization.

If the practice has a lengthy and large list of liabilities, a negative amount may be reflected in the owners’ equity category. For instance, if a practice made a large investment in equipment and build-out for a refractive surgery or cosmetic center and that line of business was not generating significant income, the liabilities would be large, without the sufficient offset from accounts receivable or cash. Subsequently, the owners’ equity and the net worth of the business would reflect a negative figure.

It is important to remember that the balance sheet could show a very positive net worth, since there might be sufficient assets to provide a positive net worth for the practice, while the cash flow and income statements reflect monthly cash shortfalls, and therefore depict a negative cash flow.

This simple overview describes the reports that are most valuable for the practice. While the practice’s accountant will prepare these reports in most cases, it is critical that both the physician owner(s) and the practice manager review and understand how to interpret them.

Issue Index | Related Articles

* * *

About the author: Ron Rosenberg is president of the Practice Management Resource Group, a health care consulting group that specializes in financial performance, computer system selection and business office management. The firm is headquartered in the San Francisco Bay area, with offices in Chicago, New York and Washington, DC. Ron authored the monthly newsletter Watching Your Bottom Line for the Academy from 1999 to 2002.