Understand your financial statement

April 10, 2011

An effective growth strategy for your medical practice should begin with a comprehensive review of the practice's business plan.

FOUR ELEMENTS OF A PLAN

A business plan is like a road map, a working template meant to provide direction for every aspect of your practice's activity.

Your first experience with developing a business plan may have come when you applied for a loan for your practice, especially if you did so over the past 15 years or so. In that time, it has become common for lenders to require submission of a business plan before they consider lending money to be used to start a practice, invest in new equipment, or purchase office space for the practice.

The financial statement is the element of the business plan that usually commands the most attention from the lender. Financial statements created to satisfy lenders seek to review both past and current performance as well as project future performance. They are designed to help the lender determine whether the borrower will be able to service the debt load-that is, repay the loan.

BASIC FINANCIAL COMPONENTS

This type of numerical analysis, when performed correctly, provides an in-depth review of the three basic financial components of a business: the income statement, the balance sheet, and the cash flow statement. In more detail:

As mentioned previously, a financial or pro forma statement is one element of a complete business plan. Often, it is written by an accountant, consultant, or other third party with little or no input from the physician, who generally is satisfied as long as the plan accomplishes its goal of obtaining whatever loan the practice is seeking. Nevertheless, don't mistake a financial statement for a comprehensive business plan, although lenders often treat a business plan as such because it does not look at the nonfinancial side of the practice.

On the other hand, although assembling a financial statement often is an onerous and time-consuming process, such a statement can be a highly useful tool. It can provide a thorough picture of your practice's financial standing-whether it is earning or losing money and how much, the value of its assets and liabilities, and what the practice is using its cash for. Consequently, it is important for you to ensure that your practice's financial statements are accurate, timely, clear, and complete, and that you and the other physicians in the practice understand them thoroughly.