financial foundations

Reading a P&L Statement

Evaluate this report to measure your practice’s financial success.

DAVID MILLS, O.D., M.B.A.

Understanding how to analyze a profit and loss (P&L) statement, also known as an income statement, reveals to business owners areas to strategize to increase profits or diminish expenses. It reveals how a business spends earned revenues as well as how much profit a business has generated.

Income

If the income is reported as revenue earned, the value must be adjusted to reflect the total receipts deposited, often listed as the adjusted gross revenue. We are only interested in the amount of cash available to the business to pay its expenses.

Expenses

Expense categories should include its percentage related to total receipts in addition to the amounts.

First, goods sold includes all expenses paid related to the sales of products as well as any other related expenses, such as the optician’s salary and benefits. The cost of goods sold is subtracted from the total receipts for the period to obtain the gross profit of the business.

The next sections deal with both the fixed and variable expenses paid during the period. Variable expenses are those expenses that are directly affected by the level of sales and services performed during the period. Fixed expenses do not vary based on the level of business, such as the electric bill.

If owner’s salaries are included, evaluate to see if they are set at reasonable levels in relation to earned receipts. Additional categories of owner’s compensation may also impact categories such as travel, educational and pension fund expenses.

Closely examine to determine the cause of shifts and avoid “knee jerk” reactions.

Depreciation expense reported for the period is a “non-cash” expense that relates to the loss of value of the assets owned by the business over time. When an asset is purchased, such as a computer system, it is useful to the business for a certain number of years, the “useful life” of the asset. This “loss in value” is reported as the depreciation expense.

Earnings Before Interest and Taxes (EBIT)

The totals of the fixed and variable expense categories are then subtracted from the gross profit to obtain the EBIT. Lenders and other investors will examine the EBIT to determine how well the business is managing its business expenses. Interest and taxes paid during the period are subtracted from the EBIT to arrive at the net profit or “bottom line” of the company.

Evaluation

When reading a P&L statement, it is important to not just compare the current period to the prior period, but also to the identical period in previous reporting years.

An initial evaluation should review how much the receipts and expenses varied from the budget. If the receipts have increased from prior periods, one would expect that the variable expenses paid would also have increased. However, the percentage of the expenses to the receipts should remain fairly stable. Closely examine to determine the cause of shifts and avoid “knee jerk” reactions.

If there was a net loss for the period, determine if it was due to a lower than expected level of receipts collected, higher expenses than expected or a combination of both. A reduction in the net profit could easily have an impact on cash flow within the business, so evaluate all expenditures to determine if any “remedies” can be instituted to improve the financial position of the practice. 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.