Basic Principles in Medical Office Accounting Lucy Carter, CPA May 8, 2018

1. Basic Principles in Medical Office AccountingLucy Carter, CPAMay 8, 2018

2. Objectives • Introduction to Accounting • Understanding the Balance Sheet • Understanding the Income Statement • Understanding the Budget Process • Controlling Overhead Expenses • Establishing a system of Internal Control

3. Chart of Accounts • Heart of any financial program or reporting • Lists of all potential accounts for which information will be gathered (eg revenue, payer reimbursements, supply expenses, staff payroll expenses, rent, utilities, supplies, etc.) • Categories include: • Income • Expenses • Assets • Liabilities • Equity

4. Accounting Methods • Cash Based Accounting • Recognizes revenue only when cash is collected and recognizes expenses only when cash is paid • Widely used by smaller practices and by all size practices for income tax reporting • Simple and straight forward

5. Accounting Methods • Accrual Method Accounting • Recognizes revenue when earned and expenses when incurred • May accurately reflect your financial position • Provides a more accurate matching of revenue and expenses

6. Accounting Terms • Fixed Expense • Variable Expense • Gross Revenue • Net Revenue/Collections

7. The Balance Sheet • Understanding the Balance Sheet • Snapshot of a business’ financial condition at a specific point in time • Report compares assets to liabilities • Assets = Liabilities + equity • Valuable information on a business’ financial strength • Banks and other lenders use this report • Usually prepared at the end of an accounting cycle (monthly, quarterly, annually) • Includes total assets, liabilities and equity • At any given time, the total assets must equal the sum of liabilities and equity

8. The Balance Sheet

9. The Income Statement • The Income Statement • Is a report of the revenues, expenses and net income for a specified period of time. • Valuable document in assessing financial condition of the practice • Valuable for creating a budget or financial goals

10. Income Statement Example

11. Income Statement Example

12. The Income Statement • Effective Financial Management • Expense Tracking • Comparisons of expenses to revenue can be monitored for efficient use of staff and supplies in comparison to work being performed • Breakeven Point • Point where revenue for services minus all variable expenses equals the fixed expenses • Seasonal Projections • Monitor trends to project the financial well being during certain seasons • Tax Planning

13. Budgeting Process • What is a budget? • Tool to translate the practice’s goals and objectives into dollars • Useful budget format is often based on the clinic’s income statement which reports all income and expenses of the practice • Actual results are adjusted for projected changes • A good budget will include a fair amount of detail without becoming overwhelmed or unmanageable • Should be reviewed monthly and compared to actual results to verify compliance and make any necessary adjustments

14. Budgeting Process • Different Methods for Creating a Monthly Budget • Build the budget based on the prior year’s revenue and expenses • Identify variable expenses and apply the respective expense percentage to the revenue budget each month • Fixed expenses should be entered, since they occur each month

15. Budget Example

16. Budgeting Process • Effective Use of a Budget Enables a Manager to: • Maintain focus on what the goals for the clinic are and what it will take to achieve them • Assess the productivity of the practice by comparing budgeted goals to actual results • Foster accountability in department managers • Analyze variances in production or costs of running the practice • Make timely changes to operations to keep on track for yearly goals • Manage growth opportunities while sustaining the current business

17. Overhead Expenses • Controlling Overhead Expenses: • A business can increase net income by increasing revenue or decreasing costs • Involve the staff? • Simply decreasing expenses is not always the best option • Example of cutting a medical assistant • Compare your current cost structures against national benchmarks for the same specialty and size

18. Overhead Expenses • Common Areas to Evaluate for Effectively Reducing Practice Costs: • Malpractice Insurance Discounts • Physicians participate in Risk Management Training • Salaries and benefits • Review annually to market benchmarks • Supplies • Creating a list of all purchased supplies • Provide to other supply vendors for a bid on your business • Look for opportunities to participate in GPO’s • Review Current Phone and Data Plans • Negotiate a better price for these services • Evaluate Purchased Services • Costs of services such as janitorial, equipment maintenance & payroll services • Building/Office Space • Negotiate lease terms, if possible

19. Statement of Cash Flow • It is important to maintain awareness of your practice’s cash flow, as it reflects the funds available to maintain business operations • Shows how much cash your practice is generating from one period to the next • Operations • Investing • Financing

20. Statement of Cash Flow

21. Cash Management • An effective cash management process is essential to ensure money paid to the office is: • Accounted for properly and deposited in the bank • Allocated to the correct accounts • Credited to the correct physician or department (charts of accounts)

22. Cash Management • Effective Cash Management Processes • Bank Deposits and Accounting Entries • Daily Receipts and Adjustments Posted • Gross Receipts Report

23. Cash Management • Effective Cash Management Processes • Internal Controls • Implement a Policy for External Accounting Audits

24. Accounts Payable • Accounts Payable • Amount a business owes to its suppliers or customers • Accounts owed to a supplier for delivered medical supplies • Refunds requested from an insurance payer for overpayments • Refunds due to patients for overpayments on their accounts • Payment for facility maintenance, utilities, rent, equipment leases, etc.

25. Accounts Payable • Effective Accounts Payable Process • Who will receive mail and deliver the invoices? • Identify a process of shipping and receiving invoices • Who will verify the accuracy of insurance or patient refund requests? • Who will receive and input all “bills” into the accounting system? • Who will cut checks verifying the correct timing and payments amounts? • Who will send out all accounts payable checks? • What is the process for handling returned or cancelled checks?

26. Entity Structures • The Different Entity Structures • Sole Proprietorship: • Simplest and cheapest way to get started in practice • Physician/Owner and the practice are treated as a single entity for tax purposes • Provides virtually no liability protection for the physician • Professional Business Corporations (PC’s) • C Corporations: most formal business corporations, have numerous stakeholders, but the corporation will be taxed on any net income • S Corporations: beneficial, issue stock, number of shareholders is limited, profits can flow directly to the owner’s personal tax returns • Limited Liability Companies (LLC) • Offer liability protection, income flows directly to the owner’s personal tax returns • Can have unlimited number of owners

27. Questions? Lucy Carter, CPA Member and Practice Leader Healthcare Industry Team lcarter@kraftcpas.com 615-346-2497