An integral part of the member service AVMA provides to its members, the AVMA Veterinary Economics Strategy Committee (VESC) is a comprehensive effort to improve the economics of the veterinary profession. I sit on the AVMA Veterinary Economics Strategy Committee Advisory Board. One of the charges of the VESC is to recommend actions to develop and deliver information to the veterinary profession that will improve the profession’s business knowledge, acumen, and financial success..
At our most recent Advisory Board meeting we discussed the consequences of the low level of economic literacy in the veterinary profession. There is no shame to veterinarians over this situation because economic literacy is not something that is taught well, if at all, in veterinary colleges. In the spirit of improving veterinarians' financial literacy, I plan to write a few brief, high impact blogs for Financial Fridays.
I believe that a good place to begin is with your Chart of Accounts, the outline strategy to keep track of your income sources and how your veterinary business’s money is spent.
Definition of ‘Outline’
- An outline is a plan for--or a summary of--a writing project or speech.
- An outline is usually in the form of a list divided into headings and subheadings that distinguish main points from supporting points
The outline of financial accounts used to create your financial statements is called a Chart of Accounts. Most veterinary business owners don’t understand what the accounts (categories) contain and almost certainly don’t understand how a chart of accounts works.
When veterinary business owners look at their financial statements, most frequently the P&L, also called the income statement, invariably they look at a category and wonder “what in the world is in that category?” Altogether too often, book keepers wonder what category to use for an expense or revenue and ultimately, they make an educated guess which leads to inconsistency in categories and an impossible position from which to manage the business. All of this happens because their outline of accounts (categories) doesn’t make sense to them. Once you understand how a chart of accounts works you will have a huge start on managing your veterinary business to achieve improved financial performance.
WHAT IS A CHART OF ACCOUNTS?
Definition of 'Chart Of Accounts'
- A listing of each account a company owns, along with the account type and account balance, shown in the order the accounts appear in the company’s financial statements.
- “Chart of accounts” is the official accounting term for the display of this information, which includes both balance-sheet accounts and income-statement accounts.
- The chart of accounts shows assets, liabilities, equity, revenues, and expenses, all in one place and broken down into subcategories.
- Each account in the list is assigned a multidigit number to help identify the account type (e.g. all asset accounts might start with the number 1).
Every transaction made in your veterinary business eventually arrives in accounting software, probably QuickBooks in all but the truly giant practices. When your book keeper begins to enter a transaction, the first decision is what account (category) to use. There will be a drop-down menu where a few letters or numbers are typed and the software shows you the choices. One account (category) is selected and the transaction is entered. The outline for all that financial input work is YOUR chart of accounts.
WHERE DO I GET A CHART OF ACCOUNTS?
Your chart of accounts may have come with the software and was designed to be used by contractors, farmers, charter airline companies, trucking companies and hundreds or thousands of other types of businesses. After all it would be too expensive to create a custom category for each type of business. Using these generic charts of accounts lead to a lot of confusion because almost none of the language used to build these generic accounts (categories) has anything to do with your veterinary business.
There are some very good Veterinary Charts of Accounts available. Dr Marsha Heinke, DVM, EA, CPA, CVPM, has created QuickBooks ready Chart of Accounts for Companion Animal, Mixed Animal and Equine Practices. The American Animal Hospital Association has also created a Companion Animal Chart of Accounts. The Veterinary Economics Strategy Committee working in conjunction with Veterinary Study Groups and American Animal Hospitals Association are developing standardized charts of accounts that will be available to AVMA members.
A good, veterinary specific, chart of accounts should come with in-depth definitions and explanations of how the numbering system works and EXACTLY what transaction goes in each account (category).
WHY WOULD I CARE?
The veterinarians I know who have taken the time to learn about their chart of accounts and followed up by incrementally improving categorization, uniformly feel like they understand their finances better and are more confident in the management of their veterinary businesses. This is often the first step in achieving financial literacy.
