Numbers for Managers: Make Better Decisions With a Customized P&L Statement

By Maureen Waddle, MBA

One of the most common financial reports for any business is the income statement, also known as the profit and loss (P&L) statement. If organized correctly, the P&L statement is an important resource for managers and owners of ophthalmic surgery centers.

The P&L statement is a report of the center’s income (revenues) and expenses for a given period (e.g., 1 year). It shows the amounts spent on various categories and whether there was a profit or loss for the period. Categorizing expenses consistently with national benchmarking standards helps management understand the ratios and relationships between revenues and expenses. This knowledge enables owners and managers to make better business decisions. It also allows a center to put its best foot forward for accreditation surveyors who evaluate both the clinical and business aspects of each organization. A keen understanding of these financial statements will help managers establish quality improvement programs that can help elevate patient care while streamlining the center’s business operations.

P&L statements are usually set up in a standard format commonly used by accountants and bookkeepers. What most center managers and nurse directors don’t realize is that these documents can be customized. When tweaked to reveal key figures, statements become more meaningful management tools. This article discusses ways to customize a P&L statement by regrouping expenses, so the statement can be used to better monitor the success of an organization’s action plan.

Customizing P&L Statements

To turn a P&L statement into a unique and indispensable management tool, consider the following adjustments and tips (see Figure 1):

Summarize. While detail is necessary for identifying opportunities, try to summarize expenses so the P&L statement fits onto two pages or less. This makes it easier for owners and managers to read. Group similar expenses together so they can be more easily summarized. Make sure all major categories being monitored have a group. Common groups for ASCs are medical supplies, staffing expenses, occupancy expenses, office expenses, equipment expenses and other.

Include Comparative Data. Actual numbers that stand alone don’t help in decision-making. Ideally, data should be compared to the budget so the following questions can be answered:

• Are we performing as expected?

• Is this an improvement from previous periods?

• Do we need more details about this particular item?

• How does this compare to our goals or benchmarks?

If a center doesn’t use a budget, the next best thing is to have a year-over-year comparison of the same time period to help answer these questions.

Categorize Premium IOLs Separately. Because Medicare restricts the amount an ASC can collect for presbyopic-correcting and toric IOLs, revenues and expenses for these items should be separated rather than lumped into traditional categories such as “facility fees” for revenues or “surgical supplies” for expenses. These revenues and expenses are unique in that they behave more like retail items than traditional healthcare services. The expense for this supply is nearly equal to the amount a center is able to collect. Because of the low differential between collected amount and expense, this is called a “pass-through” item. If not separated (both in revenues and expenses), it can artificially inflate collections and impact management ratios. The sample P&L statement gives one method for accounting for this item. As the percentage of premium IOLs increases, it becomes more important to identify the revenues and expenses separately.

Itemize and Summarize Staff Expenses. Each staff-expense category should be listed as its own unique line item, but the costs should also be summarized so that “fully burdened” staff expenses (explained later) can be understood. The individual expense categories for staffing typically include:

• Staff wages

• Payroll taxes

• Benefit expenses

• Staff education

• Retirement contributions.

Include a Column for Management Ratios. Most management ratios are set up as a percent based on the expense item divided by net collections. Such ratios are commonly used in benchmarking to allow for comparison from center to center.

Maximize the Capabilities of Accounting Software. The sample statement was created in Excel, however most accounting software packages allow creation of P&L statements that look very similar. Quickbooks is an example of accounting software commonly used for small businesses, such as ophthalmic practices and surgery centers. This program allows for entry of a budget, summarization of categories and creation of management ratios.

Tracking Results

Once revenue and expense categories are appropriately set up, it becomes much easier to track results and compare them to national benchmarks. To identify opportunities for quality improvement on the business side of the center, look at national benchmarks to identify key areas. Here are several examples of benchmarks that can be derived from P&L statements:

► Nonburdened payroll ratio: To calculate this figure, divide the gross payroll paid to employees by net collections (seen as gross profit in the sample P&L statement). The BSM Consulting Group’s healthy range (25th to the 75th percentiles) for this benchmark for ophthalmology surgery centers is 18-27%. The sample has a very low payroll ratio.

► Fully burdened staff expense ratio: As the name suggests, all of the expenses associated with staffing are included in this ratio. Total staffing costs divided by net collection will provide the ratio. The BSM Consulting Group’s healthy range (25th to the 75th percentiles) for this benchmark for ophthalmology ASCs is 24-32%.

► Operating expense ratio: The operating expense ratio (also called the “overhead ratio”) is probably the most commonly quoted benchmark. To determine this management ratio, divide total operating expenses by total revenues. The healthy range for ophthalmology centers is 60-80%. Operating expenses are the total of expenses necessary to operate the center. Periodically, owners may have some unusual expenses in the center, but these should be subtracted prior to the calculation. Managers may also look at onetime expenses and whether or not they should be included in the operating expense ratio calculation. Such items should be footnoted when making comparisons.

► Net Income ratio: The converse of the operating expense ratio is the net income ratio. This shows the profitability of the center. Net income divided by net collections results in this ratio. The typical range is 20-40%.

Make Valuable Information Readily Available

A customized P&L statement generates valuable, facility-specific information that can help ASC managers and owners make better management decisions. When the P&L statement is customized, it’s easier for managers and owners to understand their center’s financial characteristics and compare their results to national benchmarks. ◊

Maureen Waddle, MBA, is a senior consultant with BSM Consulting, an internationally recognized health care consulting firm.