If you’re not sure why financial statements should be a practice priority, here are 3 reasons well-organized and maintained books are extremely important to your personal wealth:
1. They feed into personal annual spending
As a financial planner helping clients understand their cash flow and retirement needs, one of my hardest jobs is to back into annual spending. For practice owners, my first stop is the profit and loss statement, which should show me how much a practice owner and family members are earning, retirement account contributions and any bills they would be paying for personally if they didn’t own the practice (such as auto expenses and cell phone bills). In good P&Ls, this information is easy to find; in most, it is not.
My next stop is the cash flow statement. Most practice owners take their income in a combination of (hopefully fair market) salary and distributions. Distributions are notoriously mis-marked either to the profit and loss statement or buried in the balance sheet, making it hard to come up with an accurate number. And it's almost impossible for me to get a good picture of annual spending without without a precise distribution figure.
2. They are the basis for value
As part of planning, I do practice valuations so that owners have some sense of how much they might someday sell their business for, as well as what they might net after taxes and debt pay off. To do this accurately, an up-to-date profit and loss statement with correct interest expense, depreciation and owner benefits is the best way to ensure a realistic value (and ideal sale price). On the balance sheet, up-to-date loan balances help give an accurate picture of how much of a sale price goes to debt pay off and what the tax allocation between asset values and goodwill might be.
3. When you need them, you need them
It’s very easy to think that you’ll fix your financials at a later date. I encourage practice owners not to kick the proverbial can down the road. One practical reason is financing. Practice loans and even personal mortgages for practice owners take a deep dive into financial statements. Poorly prepared statements can impact borrowing capabilities.
Another common fire drill that comes up is unsolicited offers to purchase, both from associate doctors and Private Equity. I’ve had many clients spend their weekend(s) fixing their financial statements to maximize practice value to a potential buyer. Think of it: most buyers look back 3 years- that's 3 years of recategorizing and editing transactions. These clients would tell you it would have been much easier to just keep good books in the first place.
The last and possibly most important reason to keep good records ongoing is in the event of a business disruption. A real-world case: an owner passed away and it took 4 weeks for the family to get financial statements to a potential buyer. 4 weeks of patients going elsewhere for their care. 4 weeks of staff uncertainty. In the event of death or permanent disability, every day the practice is waiting to be sold it loses value. Having to generate or fix financial statements is a terrible burden to put on loved ones in the event of an unexpected loss.
Let these points be a good reminder that taking care of what's likely one of your most valuable assets- your practice- is so important on an ongoing basis. I hope to see you December 8th to share best practices and good techniques to keep your practice looking great on paper.