FINANCIAL FRIDAY POP QUIZ: This is our first ‘Financial Friday’ Quiz. All the information necessary to answer this quiz question is contained in prior “Financial Friday” blogs.
SCENARIO: The veterinarian looks at her income statement (P&L) and her bank account and says “I’m going to change accountants. Mine says I made a profit but I don’t have any money in the bank account.”
QUESTION: What did the veterinarian overlook in the process of making the decision to change accountants?
Every practice, even a one doctor practice with no assistant and no book keeper, has a team. For some reason when I ask a veterinarian how many people are on their team, they always tell me how many receive a regular paycheck. Omitted are attorneys, management professionals and accountants. In many veterinary businesses the accountant is the least recognized and most underutilized member of the team. “Why” is the first question I usually hear when I make that statement to a Virtual CEO client about accountants.
In my opinion incentives always work. The problem with incentives is that sometimes we are surprised by what we incented. Unintended consequences are the results of an incentive plan that yielded results different from what we intended. In the usual veterinarian/accountant working relationship, the veterinarian consciously or unconsciously judges the performance of the accountant by how many dollars in taxes the business pays. When the veterinarian decides the practice is paying ‘too much’ in taxes, they often replace the accountant. The incentive is very clear to the accountant. If she wants to keep the account, keep the taxes low. Keeping the taxes maximally low can lead to cash flow challenges and a practice balance sheet loaded up with shiny new unnecessary equipment (and corresponding debt) that was acquired to keep taxes low but may have also decreased the financial health and value of the practice. (See last Financial Friday to read about the impact of balance sheet debt on a practice.)
Managing the tax liability of a veterinary business is only part of the role of an accountant in managing the practice. Optimizing cash flow, practice value and exit strategy are three key roles for which the accountant is probably the very best equipped person on the team.
Since you have to be smart to get into vet school and get out of vet school, we have established that veterinarians are smart people. Therefore, there must be another reason that we don’t utilize our accountants to optimize cash flow, practice value, and exit strategy. That reason is pigeon-holing. I believe that accountants get stuck in a category, “tax accountant” just like veterinarians get categorized as “general practitioner.” I know a lot of really well-rounded and talented veterinarians who are pigeon-holed by their practice and their clients into a very small segment of their true veterinary ability. People only think of them as “general practitioner.” Clients believe all the veterinarian does is wellness work so they look for someone else to work on sick or injured animals. The same scenario happens when veterinarians think about accountants. They think “tax accountant.” They don’t think “practice advisor, already on my team, who knows everything about my business financials.”
What an opportunity! By broadening the scope of your own thinking, you already have a built in advisor who understands the financial story of your practice. You have just been incenting the wrong behavior by only asking your accountant about taxes and not asking for help to optimize cash flow, practice value, and exit strategy.
ANSWER TO QUIZ QUESTION: The veterinarian overlooked the fact that not all of the expenditures related to the practice are contained in the Income Statement (P&L).
- The bottom line on the Income Statement (P&L), profit, Becomes the top line on the cash flow statement.
- The bottom line on the cash flow statement, cash from operations, becomes the top line on the balance sheet, cash.
- The cash reported on your balance sheet should equal the amount of money you have in the bank.
- By not understanding that there are off-P&L expenditures that are reported on the balance sheet, the veterinarian is positioning herself to replace a perfectly good accountant that just needs to know she wants more than low taxes. She wants some managerial input.