It is January 20th and most veterinary businesses have their year-end 2016 financial statements out by now. As soon as your financials are available, take some time to review how your practice performed last year.
Let’s review the three key financial statements and their purpose.
- The year-end Profit and Loss, also called Income Statement, tells us how much profit the practice of veterinary medicine made during 2016.
- The year-end Cash Flow Statement tells us what we did with the profit during 2016.
- The Balance Sheet is a snapshot in time that tells us what we have to show for the money we made in 2016 as of December 31, 2016.
Many veterinarians don’t understand why all of the costs associated with the practice are not recorded on a single statement, the P & L, where they expect to see them. In order to fully understand the performance of a business, instead of using one ‘check register’ type report, business financials separate income and expenses associated with generating the business's profit from the income and expenses associated with generating non cash assets. The cash flow statement and balance sheet is a snapshot that shows you the cash you had on hand at the beginning of the period plus cash derived from profit during the period, minus liabilities, plus non-cash assets. Don’t be frustrated if you find it difficult to understand the three financial statements in the beginning. After a few repetitions, you will “get it.”
With that review in mind, have your book keeper print your side by side 2016 year end and 2015 year end P & L and Balance Sheets. In most small business accounting systems, the cash flow statement information is rolled into the Balance Sheet instead of being presented as a separate statement. Ask your book keeper to point out to you anything that doesn’t make sense to her. Armed with that information, review the statements using the ‘test of reasonableness.’ Look for lines that just don’t make sense. Now compare your list to your book keepers list and the two of you dig through the source documents (receipts, invoices, etc) until you understand each line.
It never ceases to amaze me how often this year-end review exposes something very bad or something very good that had previously gone unnoticed.
Now that you understand how your practice performed financially, set some goals for 2017 to change some financial results. If you make a little progress each year, learning from the past and changing the future, your business will consistently improve its profitability, enterprise value and marketability (to the next owner).