A business adviser to a two-physician medical practice asked if I could help him understand the practice’s financial reports. The two practitioners were each convinced the other was not contributing sufficiently to generating income, and the adviser was asked to help them understand just what each was contributing.
It turned out problems were related to the patient revenue report. Each partner understood it differently. The term “revenue” refers to billings – the amount charged for services performed. The junior practitioner understood revenue meant patient billings while the senior partner thought it meant collections. In most medical practices, there is a huge difference between fees charged and how much is actually collected. Each topic, revenue and collections, should be analyzed and clearly defined.
The next misunderstanding dealt with collections or payments received. Patient payments are recorded in one column and insurance payments in another. The insurance payments should be applied against specific patient accounts. However, because of confusion and misunderstanding by staff members, the patient allocations are often applied quite some time after received or, in some cases, not at all. These receipts, which are often substantial, go into a column called “non-allocated payments.”
The senior partner prepared the analysis of revenue generated by each doctor. He had further misunderstandings that gave him an inaccurate picture. No doubt, both partners will be stunned to learn the true picture.
What’s the moral of this story? Don’t assume you understand what your books are telling you. Don’t even assume they are accurate. Understanding accounting and financial statements is easy if you are an accountant, but not so easy for the nonfinancial person.
Think for a moment about the above story. Translate the terms to those pertinent to your business. Sales, accounts receivable and cash received will be more familiar terms for most businesses.
If records are critical to the understanding of your business (and they are), how can you improve your understanding and use of these key tools? Begin by requiring your accountant to explain each report, its purpose and specifically how you can use it to make better decisions. Ask for help identifying and tracking the three most important key indicators of your business. Those key indicators will be different for different businesses. Ask for those explanations in language and terms you understand.
The three vital financial reports are the income statement (also called the profit and loss or P&L), the balance sheet and the cash-flow statement. Most business people pore over the income statement and ignore the other reports. They ignore them because they don’t understand them.
Resolve today to make a practical understanding of your financial records. You will find management of your enterprise actually becomes easier when the numbers become your friend rather than something to be endured or ignored.
Bowser@BusinessValueInsights.com. Dan Bowser is president of Value Insights, Inc. of Durango, Chandler, Arizona, and Summerville, Pennsylvania.