Finance and Accounting

1. Finance and Accounting Presented by: Bruce S. Maller, President / CEO BSM Consulting

2. Session Agenda Overview of Entity Structures Accounting and Finance Basics Business Planning Applications Financial Case Studies

3. Entity Structures

4. Common Forms of Doing Business Corporations S Corporation C Corporation Others Limited Liability Company (LLC) Limited Liability Partnership (LLP)

5. Accounting Basics

6. Balance Sheet Terminology Basic Accounting Equation Assets Liabilities Owner’s Equity “On a given day what a practice owns must equal what it owes (either to creditors or its owners).”

7. Accounting Methods Accrual Basis Cash Basis • Income measured when cash is received. • Expenses measured when cash is spent. • May distort true picture of practice performance. • Income measured when services are rendered. • Expenses measured when transaction occurs. • Provides more accurate picture of practice performance. Most practices prepare financial statements on the cash method.

8. Common Accounting Terminology Accounts Receivable (A/R) Charges outstanding for services rendered to patients. Contractual Adjustments Amounts “written off” due to contractual adjustments. Accounts Payable (A/P) Amounts owed for previous purchases. Generally Accepted Accounting Principles (GAAP) The concepts, rules, and procedures for accrual based accounting practices.

9. A reduction in the value of fixed or capital assets by use, wear and tear, or obsolescence. What is depreciation? Spreads the cost deduction of an asset over the asset’s estimated useful life. The expense for depreciation is reflected on the P&L as a non-cash item.

10. Financial Statement Basics

11. What do financial statements do? Provide “barometer” of practice financial health. Create historical record for internal trend analysis. Allow review and intervention to reach financial goals. Provide fact for determination of value.

12. What to look for on the balance sheet? Balance Sheet Cash on Hand Current Assets Current Liabilities Long-term Debt Shareholder’s Equity • Management Ratios: • Current ratio • Debt to equity ratio

13. Sample Comparative Balance Sheet 12/31/11 12/31/10

14. What to look for on the income statement? How to Assess Operating Results Revenue and Expense Owner Compensation Business Trends Key Expense Categories: • Staff payroll • Rent • Marketing and advertising • Professional fees Management Ratios: • Cost of goods ratio • Gross profit ratio • Net income ratio • Operating expense ratio • Payroll ratio • Rent expense ratio

15. How to Assess Operating Results 12/31/10 12/31/11 to 12/31/10

16. Financial Analysis in the Business Planning Process

17. The Benefits of Financial Analysis Report card of financial health Score card of progress in meeting goals Effective means of testing project feasibility Tool to facilitate business valuation Tool to facilitate business planning

18. What do you want to assess? How efficient is the business? • How much does the owner take out of the business? How productive are the providers? • Evaluate and compare historical production levels of physicians/ professionals. How diversified is the business? What are the sources of revenue and how much risk is present?

19. What about efficiency? Dollars In Net Revenues Gross Margin Operating Expenses Net Income Owner Compensation Dollars Out (to owners)

20. What do you want to focus on? Options: Improve operating margin? • COG, staffing, rent, marketing, other costs? How productive are the providers? • Services, provider mix, other service lines? How diversified is the business? Product, service, and payer mix?

21. Top 3 Efficiency Ratios Operating Expense Ratio Identifies practice efficiency in converting collections into professional compensation. Payroll Ratio • Identifies practice efficiency in utilization of personnel. Rent Expense Ratio Helpful in evaluating efficiency of capacity utilization.

22. Top 3 Productivity Ratios Revenue per FTE Provider • Assessment of provider productivity; • track year-over-year trends and inter-doctor variances. Revenue per FTE Staff • Assessment of staff efficiency and productivity; • evaluate year-over-year trends. Number of Key Procedures • Compare practice procedure volume to industry trends; evaluate results by provider.

23. Diversification Measures • Measure of provider revenue as percent of overall clinic revenue. • Assessment of revenue contribution by individual providers. • Measure of diversification related to mix of services. • Assessment of ability to cross-promote other services with existing patients. Ancillary Services Professional Services

24. Break Even Analysis

25. Common Strategic Initiatives Requiring Break Even Analysis Adding a new provider. Adding a new service line. Opening a new office. Implementing a marketing campaign. Developing a surgery center. Purchasing new equipment.

26. Common Strategic Initiatives Requiring Break Even Analysis • Definition: The level of business activity necessary to cover the fixed and variable costs of an investment. Note: The level of business activity can be stated in terms of revenue or units of production.

27. Expenses Fixed Expenses • Do not vary with number of patients seen • Includes rent, some salary, insurance, utilities • Increases or decreases are more incremental • Measure of business risk Variable Expenses • Proportional to level of business activity • Relates to number of patients or units of service • Includes: include medical/surgical supplies, some salaries

28. Common Strategic Initiatives Requiring Break Even Analysis • Expenses that vary upon reaching critical quantity of services. Clinical Personnel Office Space Data Processing Equipment

29. The Cost/Volume Relationship

30. Break Even Analysis

31. Case Studies

32. Case Study 1 Surgical Associates is contemplating bringing on a new associate. The practice is tight on space but has adequate equipment in the practice to meet the needs of the new provider. The administrator feels the practice may need to hire two to three additional FTEs to support the new associate. The practice has an option on 1,200 square feet of adjacent space. Your research indicates the new provider will require a starting salary of $225,000 plus a production bonus in the range of 30% of net collections above three times the base salary. What would you estimate to be the “break even” for the new provider?

33. Case Study 1: Questions What information do you need in order to complete your analysis? 1. What possible variable costs will be associated with the new provider’s employment? 2. What additional fixed costs do you think the practice may incur? 3. Calculate the break even for new provider in terms of collections. 4.

34. Case Study 2 Dr. Swanson is a physician that you have worked with for the past few years. At a recent meeting, Dr. Swanson mentioned to you that he was interested in purchasing a new laser. He asked if you had any experience or knew of other clients that have used this particular type of laser. He seemed to be fairly well along in his decision making process; however, he had not yet signed a purchase contract. He mentioned that the financial model provided by the sales person was very attractive in that he could expect a payback on his investment in under 9 months. You offered, and he accepted your suggestion to complete some type of feasibility study to assess the break even point and possible return on investment.

35. Case Study 2: Questions What information do you need in order to complete your analysis? 1. What would you estimate the total capital investment required for the project? 2. What do you estimate to be the total variable and fixed costs of operating the business in year one? 3. Based on your assumptions what is the projected return on capital investment? 4.

36. Any Other Questions?