financial foundations

Getting Down to Basics

An introduction to our new monthly look at business management.

David Mills, O.D., M.B.A.

As small business owners, optometrists cannot afford to ignore the business aspects of their practices. This is particularly true given the current economic forces and the seismic changes on the horizon in the delivery of health care.

An understanding of the business is critical to survival. The fact that you may have a positive balance in your checkbook at the end of the month does not necessarily mean that your business is thriving, or even surviving.

This column will identify key financial indicators each month that will aid you in becoming a better financial decision maker. Trend and ratio analysis metrics are the cornerstones on which we will focus . We are not accountants; however, as decision makers, we no longer have the luxury of waiting for fiscal year-end financial statements to evaluate practice trends and ratios. As you will learn, some should be evaluated on a monthly basis, some quarterly or semi-annually.

Gathering data

Many of our practices have their own cyclical financial footprint. Some months are historically “busier” than others.

When performing financial analysis, it is important to compare “like periods” — compare first quarter data of last year to first quarter data of this year. It is also important to account for any significant events that may have had a positive or negative impact on the data.

For example, many practices on the east coast lost most of a week’s worth of patient care due to Hurricane Sandy in October. This must be taken into account when comparing with data collected in 2011.

Using the data

What are the objectives in collecting all this data? As mentioned, the primary goal is to provide financial information to the decision makers in the practice. The owner, the financial consulting team of accountants and advisors utilize these metrics to take corrective actions when indicated. Secondarily, this information is critical in securing lines of credit and other financial lending. It will also provide the baseline financials when negotiating with a prospective new partner or transitioning the practice to new owners.

Key terms

In starting this journey, we need to be sure we are defining some key financial terms in the same manner.

For instance, revenue is the amount of dollars you charge for a specific service. Most practices accept a multitude of medical and vision insurance plans. The amount you bill insurance for a specific service rarely is the same as the amount that reimbursed. Revenue is the dollar value you submit on the claim. The receipts are the amount of dollars you actually receive and put in the bank. The difference between revenue and receipts is often called the “write off” or “adjustment.”

Since we will be making financial decisions based on monies collected, our practice is only interested in the level of receipts in any trend or ratio analysis.

2013 and beyond

I look forward to taking this journey with you on the road to financial success, beginning with next month when we discuss how to read a P&L Statement. OM

DR. MILLS PRACTICES AT OCEAN STATE EYE CARE IN WARWICK, R.I., AND HOLDS A M.B.A. FROM PROVIDENCE COLLEGE. E-MAIL HIM AT MILLSD@NECO.EDU, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.