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Finance and Accounting. Presented by: Bruce Maller BSM Consulting. Session Agenda. Overview of Entity Structures. Accounting and Finance Basics. Business Planning Applications. Financial Case Studies. Entity Structures. Common Forms of Doing Business. Corporations. S Corporation
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Finance and Accounting Presented by: Bruce Maller BSM Consulting
Session Agenda Overview of Entity Structures Accounting and Finance Basics Business Planning Applications Financial Case Studies
Common Forms of Doing Business Corporations • S Corporation • C Corporation Others • Limited Liability Company (LLC) • Limited Liability Partnership (LLP)
Case Study Plastic Surgery Associates (fictitious name) is a single location, group practice with three equal partners. The practice is setup as an LLC with each physician owner having his own P.C. The doctors own and operate a medical spa in a separate legal entity. In addition, the doctors have an ASC that operates under a separate tax identification number. The partners own the building in another LLC which leases space back to the three operating companies.
Case Study Real Estate Company Medical Spa Plastic Surgery Associates, LLC ASC Partner 1, P.C. Partner 2, P.C. Partner 3, P.C.
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.
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.
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.
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.
What is a balance sheet? Why is it important?
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).”
Balance Sheet What to look for on the balance sheet • Cash on Hand • Current Assets • Current Liabilities • Long-term Debt • Shareholder’s Equity • Management Ratios: • Current ratio • Debt to equity ratio
Asset Categories Current Assets Cash or other assets that can be sold or consumed in the near future. Tangible Assets Non-current assets including furniture, equipment, and leasehold improvements. Other Assets Other non-current assets such as investments or deposits.
Liabilities Current Liabilities Liabilities due in the same interval in which current assets will be consumed. An interval of one year is normally used. Long-Term Liabilities Long-term loans or leases due, less amounts due within 12 months.
Shareholder’s Equity Two Basic Categories Paid-In Capital: Retained Earnings: Sum of all accumulated earnings after taxes and dividends paid Investment made by the owners
Accounts receivable are not normally included under current assets Accounts payable are generally not included under current liabilities Challenges When EvaluatingCash Basis Balance Sheets Lack of knowledge or experience of some clients
Management Ratios Test of liquidity to evaluate the degree to which a practice’s current liabilities can be met by utilizing current assets Current Ratio Current Ratio Current Assets Current Liabilities
Sample Current Ratio $200,000 Benchmark for Professional Practices: 2 to 1 1.33 to 1 Current Ratio $150,000
Management Ratios Measure of the proportion of assets which are financed through debt and shareholder’s equity Debt to Equity Ratio Long Term Liabilities Debt to Equity Ratio Total Equity
Sample Debt to Equity Ratio $500,000 Benchmark for Professional Practices: 5 to 1 10 to 1 Debt to Equity Ratio $50,000
Balance Sheet Highlights Current Ratio: 0.42 to 1 Debt to Equity Ratio: N/A Book Value of Fixed Assets:$38,539
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
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
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?
What about efficiency? Dollars In Net Revenues Gross Margin Operating Expenses Net Income Owner Compensation Dollars Out (to owners)
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?
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.
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.
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
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.
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.
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
Common Strategic Initiatives Requiring Break Even Analysis • Expenses that vary upon reaching critical quantity of services. Clinical Personnel Office Space Data Processing Equipment
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?
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.
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.
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.
