Mar 25, 2016 by Edward L. Blach, DVM, MS, MBA
Your P&L is an accounting of revenues and expenses over a specific period of time. In order to understand and intepret your P&L, you should first understand if you are using a cash or accrual method of accounting. For a brief description, go to Investopedia. There are a number of online resources that provide brief explanations of these financial terms and principles. The cash method of accounting allocates revenues and expenses when they are received or disbursed, rather than when they are incurred. The accrual method allocates revenues and expenses when they occur. For example, if you purchase drugs and medical supplies in December but don't pay for them until April, the accounting differs under accrual versus cash accounting methods. Under accrual accouting, those expenses hit your books in December when they were incurred. Under the cash method of accounting, they are applied when the drugs and medical supplies are actually paid for in April. It is recommended that veterinary practices use the accrual method of accounting for a number of reasons. The accrual method is required for some types of businesses and recommended for those that want to properly manage profitabilty due to the ability to evalute cash inflows and outflows as they occur, rather than when the cash actually moves. The timing of when transactions are applied to your books can have a dramatic impact on the P&L, and your ability to properly evaluate what works well and what does not. Your P&L when kept current provides an up-to-date measure of the revenues and expenses of the practice. It can be compared to last year's P&L as a benchmark, or to a budget that you established at the beginning of the year. Keep your P&L up to date and make sure that you understand how to use it to optimize your practice financials. We'll discuss in the future the importance of your balance sheet and cash flow statement, and using them along with your P&L. Please submit questions on this topic that will be answered in the near future.