BUSINESS

  financial foundations

2014 Report Card

Use these strategies to determine your “final grades”

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

As we close the books on 2014, for many of us it’s also the close of the fiscal year. Shortly, you will be receiving the accountant’s report on the financial health of your business.

Here are some strategies to use in reviewing your “final grades.”

Be objective

When examining year-end reports, most focus on just two things: (1) how much money the practice made and (2) how much tax you owe. However, reviewing the profit and loss statement, balance sheet and statement of cash flows with your accountant will provide a much greater understanding of how well the practice is being managed.

When analyzing these reports, try to remove your bias as the practice manager, and take on the “role” of a potential purchaser of your practice. The focus of your review will change, and you will gain a much better understanding of the data.

The big three

There are three areas I suggest spending the greatest time examining: (1) net sales revenue, (2) cost of goods sold (COGS) and (3) accounts receivables.

1. Net sales revenue: This is how much money was collected and deposited from the delivery of services and sales of products prior to paying any expenses. Hopefully, your net sales revenue is greater than previous years.

The rate of growth will depend on a number of factors. If your practice is less than two years old, you would expect a fairly substantial rise, as the business should be growing. Less than 10% growth should lead to some deep analysis.

For the long-established practices, the growth rate would be lower. Review the strategies you deployed earlier in the year. Did you hire a new associate, offer different patient services, or did an associate retire? These, and other factors, could affect the net sales revenue.

If no substantial changes were made, you would hope for a 3% to 6% growth rate. Anything less, especially if the net sales revenue has decreased, requires in depth analysis to determine the causes.

2. COGS: Cost of Goods Sold is the dollar amount spent in the delivery of product in the business. The COGS is divided by the net sales revenue to determine the percentage of COGS sold to net sales revenue. This is the key indicator.

If you have expanded operations by adding more optical retail space this year, you might expect a slight increase due to the increase in inventory purchasing. If no substantial changes were made, this value should at LEAST be static, but preferably slightly lower.

3. Accounts receivables: The change in accounts receivables should be in direct relation to the change in net sales revenue. In other words, if net sales increased, you would expect an increase in accounts receivables. To determine whether the accounts receivables are being properly managed, divide the accounts receivables by 365, the number of days in the year. Ideally, this value will be between 15 and 18 days.

It is vitally important to examine the aging of the receivables. Receivables more than 60 days old are at the greatest risk of non-collection. The percentage of accounts that are 60 days or older should decrease. If the percentage has increased, an immediate evaluation on how you manage the accounts receivables must be initiated.

Looking forward

Hopefully, you did not receive many “deficiencies” this year. Let’s all strive for an A+ 2015. 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.