BEST PRACTICES

A P&L statement is a financial roadmap

It recaps the vital data that let you make critical decisions; like a medical history, but it’s for your practice’s health.

By Andrew Maller, MBA, COE

A profit and loss (P&L) statement is meant to be used for making decisions that impact the direction of your practice. The P&L should be used for stimulating strategic conversations between partners and practice leadership, and it should be a vehicle to show how the business has performed over time to forecast future results. Unfortunately, though, too often practice leaders scan it briefly and toss it aside, thinking, wrongly, it’s just another report lacking much meaning.

Would you toss aside a patient’s medical history?

THE P&L ~ A PHYSICAL

Essentially, a P&L statement summarizes revenue, operating expenses and net income for a specific time period. Along with the practice’s balance sheet and, perhaps its accounts-receivable aging buckets, the P&L is an excellent resource for a practice to determine its financial health.

As a consultant, I am frequently asked to assess the financial health of practices. Typically, I am hired because the practice is facing a subjective symptom, similar to these examples:

• The owners are making less money this year.

• Practice staffing costs are too high.

• The dispensary isn’t profitable.

Accurately assessing these “subjective” concerns requires an objective analysis. The first report I usually look at in this process is the P&L statement. My goal is to get an initial snapshot of how the practice has performed — or varied — during multiple time periods. If the P&L is organized correctly, I should be able to quickly pinpoint trends and areas of concern. This will prompt which direction I go to next to diagnose the subjective concern(s).

While my initial investigative path should be no different than the way a business owner or administrator should use his practice’s financial statements, the reality is that I see tremendous variability in the way P&L statements are organized. Yes, a practice’s P&L might be correct from a quantitative standpoint; however, if it lacks clarity, is poorly organized or is difficult to interpret, then using it as a tool to make better business decisions becomes a moot point.

COMMON TRAITS OF AN EFFECTIVE P&L

Regardless of the type of ophthalmic practice or where it’s located, I have found that the most useful P&L statements share several common traits. If your practice is looking to improve the quality of its reporting, consider implementing these simple changes to make sure your P&L statement is an effective management tool.

Your P&L should:

1. Be comparative. A meaningful P&L statement should allow for an apples-to-apples comparison to a prior time period. But I have found that many a monthly or year-to-date P&L only shows the current time period, thus making it a seek-and-find project to gather the appropriate corresponding data to see how the practice is doing.

Along the same lines, another option would be to compare your current results to your budget. Again, a properly designed financial statement should provide its user the ability to compare it to historical trends and forecasted results.

2. Show percentage of revenue. A common way practices compare themselves to industry benchmarks or historical trends is by using benchmarking. In many of the common benchmark metrics, such as overhead or staff payroll ratios, an expense is divided by the revenue for the same time period. When a practice makes it a habit to regularly track these types of ratios, it makes predicting potential problems an easier task. Although many of my clients create separate benchmark reports, it’s also easy to customize your P&L to show the percentage of revenue next to each expense line.

3. Delineate different revenue and cost centers. Usable financial statements allow the practice to generate separate P&Ls for various practice service lines. For example, if the practice has an optical dispensary within the same business entity of the practice, the proper tracking of revenue and expense allocations allows owners and administration to determine the overall efficiency and profitability of each service line.

Of all the tips I am suggesting, this one will likely take the most amount of time to implement, but it may provide the most insight. As a starting point, make sure you can:

• allocate direct revenue (e.g., optical sales)

• allocate expenses (e.g., frames, lenses, labor costs).

The challenging part is allocating indirect costs such as occupancy, office supplies and so on. This will take time and creative thought, but, ultimately, it will allow for the better management of each line of business in the practice.

4. Group expense categories. When measuring expense trends for specific categories (such as staff labor, occupancy and marketing), it helps to group related categories.

But, often the expense categories are not sorted logically. Try starting by grouping categories that represent a large percentage of your total expenses.

If your accounting system does not provide this level of customization, at a minimum make sure the expenses are alphabetized. This will make the review process much easier.

5. Track staff and provider labor expenses separately. This is the largest practice expense, so it is vital to be able to track staff labor costs — including wages, payroll taxes and benefits — separate from provider costs.

In many practices that I work with, staff and provider costs are lumped together, which makes it challenging to evaluate the efficiency of either group.

On the provider side, separating these costs lets the practice evaluate labor costs as a percentage of revenue, which is helpful in evaluating productivity over time.

POWERFUL TOOL

Most of these changes can be easily implemented in an accounting system. However, as with many other important practice projects, the challenge usually centers on finding the time to get it done.

In determining which of these tips to tackle first, let the practice’s goals and business plan serve as a guide.

By following these tips, you can turn your P&L statement into a very powerful business decision-making tool. OM

Andrew Maller is a principal and consultant with BSM Consulting, an internationally recognized health-care consulting firm in Incline Village, Nev., and Scottsdale, Ariz. For more information, visit www.BSMconsulting.com.