In my family we have this unfortunate habit of shifting the conversation at gatherings toward the optometric industry. Our spouses listen politely as we debate the future of the industry, whether we've reached the peak of private equity and other riveting topics. BUt there's one recurring conversation we have that is worth sharing: best practices for financial statements, specifically the profit and loss statement (P&L). We have spent many an evening lamenting about what we wish we’d see versus what we typically see on that report.
Since we’re two weeks away from a New Year with new financials, this seems like the perfect time to ask doctors to make one change that their Financial Advisor, Practice Management consultant, CPA and other advisors will all appreciate: Owner’s Compensation, (also sometimes referred to as Officer’s Compensation).
Many doctors don’t use this section at all, lumping their payroll in with their staff’s or all doctors and their mostly personal expenses in with general practice expenses. And the ones who do seldomly use this section in a comprehensive manner. This makes it extremely difficult to pinpoint actual practice profitability, a number every doctor should know annually anyway, and a critical component of practice pricing when you’re ready to sell. The less profitable your practice appears, the less you'll likely be able to sell it for.
For this newsletter, I called up my brother Nathan Hayes, long practice management consultant, about best practices for the Owner’s Compensation section of a P&L. He suggests the following should be included in this category:
- Owner’s salary
- The payroll taxes and expenses attributable to the owner
- Owner’s benefits, such as healthcare, retirement plan contributions
- Auto expenses, if application
- Travel and education expenses of the owner
- Food and entertainment expenses
- Any other expenses/benefits that a new practice owner might not incur
From Nathan’s perspective, this enables a practice management consultant to pinpoint actual profitability and make recommendations based on real practices finances rather than padded numbers. Your CPA will love having numbers they can easily identify and work with for your tax return. A broker or appraiser can more easily determine the value of your practice. And your wealth advisor will be able to accurately represent your practice on your personal net worth statement as well as understand how much to adjust personal spending by when you sell your practice.
In 16 days, your financials get a fresh start. Take a few minutes to pop into your accounting software and add this category and all the sub components that apply to you, or forward this email to your bookkeeper and as them to do it—think of it as a great holiday gift for your practice.
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