By Adam Cmejla, CFP®
Jan. 23, 2019
The beginning of the year offers a fresh slate to do better. One area many practice owners I’ve worked with can do better in is financial review, and setting financial goals for the New Year. Here are the top actions you should take to ensure your financial management in 2019 is effective.
Review “The Big Three” Financial Statements
These are commonly referred to as your profit/loss (also called your income statement), your balance sheet and your statement of cash flow.
Income Statement
Your income statement, in its most basic form, will show your gross collected revenue minus your operating expenses to show the net income (profit) of your business. The look of your income statement will vary depending on the structure of your business (sole proprietor vs. S-corporation).
Balance Sheet
Your balance sheet is a snapshot in time of what your business owns versus what it owes. In other words, this is your “business net worth.” Remember the formula: assets = liabilities + shareholders equity.
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Statement of Cash Flow
Statement of cash flow is a report that accounts for cash received and spent in the business, and is generally broken down into three sections: operational, investment and financing. Determining the health of your cash flow and its relationship to your income statement, while also understanding the net worth of your practice (balance sheet), are critical to understanding the health of your practice.
However, if you don’t review these statements periodically, it’s difficult, at best, to make smart financial decisions and look for ways in which you can improve the financial health of your practice. As Peter Drucker, one of the most prolific and respected management experts, was fond of saying: “What gets measured gets managed.”
Start by making sure your books have been closed out for the year and properly reconciled. If you’re still closing your own books, my strong suggestion is that you outsource this responsibility to a qualified accounting professional or CPA as an OD’s time should not be spent with easily-delegated tasks such as this, but rather, spent either promoting and positioning their practice in the community, working strategically on the practice, or seeing patients.
Next, pull 2018 reports for all three and make sure to include a 2017 comparison and toggle the reports to display the line items by percentages. This includes percentages as it relates to gross revenue as well as comparing year-over-year. This is an easy option to include in Quickbooks and other accounting software. Displaying previous year values can be done for the balance sheet and income statement only; the statement of cash flow will have to be pulled as two separate reports.
Now go through your reports line by line and give good, critical thought to those numbers. How did they compare to 2017? What caused numbers to go down/up/stay the same? As a reminder, here’s a rough breakdown of what some key numbers should look at in a traditional practice:
COGS (Cost of Goods Sold): At or below 30 percent.
Staff (non OD): Aim for 25 percent
Occupancy (includes rent, taxes, insurance, maintenance, etc): 7-8 percent
Marketing: in a new practice that is in high growth mode, this might be closer to 5 or 6 percent. In an established practice, you might be around 3-4 percent
Equipment (includes debt service on equipment): 3 percent.
General Overhead: 7-8 percent
Connecting Financial Observations to Action Plans
For the line items where you are either over-budget on expenses or under-performing in revenue, use this as an opportunity to jot down these items and use this information as you continue to goal-plan for 2019. Write them down and share them with your leadership team and/or your staff and emphasize the goals you want to accomplish.
Don’t let them just secretly marinade in your head. One of the most successful practice owners I’ve ever known shuts down his office once per month to meet with his team, review their numbers, and makes sure they are on track with their goals and improving the patient experience in any way they can.
As you look at your numbers, don’t just identify what went wrong. Make sure to highlight areas where you over-performed as well and, if applicable, make sure you single out and reward your team for their contributions. Remember, your success is predicated upon a successful team. Some of the most successful practices I’ve ever worked with have owner-ODs who check their ego at the door and realize that their success is largely attributed to a team that buys into the culture, goals and intentions of the practice.
As you continue to analyze the numbers of your practice, pick two or three areas where you under-performed and determine the root cause of the issue. Don’t try and tackle all of them at once—studies show when you try and focus on everything, you might as well focus on nothing. Instead, find those two or three that will have the biggest impact to your bottom line and health of your practice and begin working on your improvement plan.
Again, discuss this with your team—the feedback that you get from them can be invaluable as you plan. Once you’ve determined the root cause, collectively agree on what steps you can modify in the practice to realign your and/or your team’s actions with your intentions, and agree to review these on at least a monthly basis.
If the improvements are largely your team’s responsibility, ensure that there is some type of financial reward in place for hitting pre-determined targets. If they are your responsibility, ask your team for assistance with holding you accountable to your own goals. It may seem counter-intuitive to have your team manage you, but sometimes public accountability is just what we need.
Adam Cmejla, CFP® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and Founder of Integrated Planning & Wealth Management, LLC, an independent financial planning & investment management firm focused on working with optometrists to help them reach their full potential and achieve clarity and confidence in all aspects of life. For a free copy of his “Top Five Tips to Financial Freedom” visit https://bit.ly/2Mo3NV8 and check out “The Dose Podcast” wherever you find your favorite podcasts to get more tips on making smart, informed financial and business decisions.
