Finances

Measure Profitability with a Profit & Loss Statement

By Melanie J. Denton, OD, FAAO

SYNOPSIS

Like any small business owner, OD-owners need to closely monitor their practice’s gross and net revenues. Do it like the pros do: Generate a P&L statement and review it regularly.

ACTION POINTS

GENERATE A P&L STATEMENT. Trackthe profitability of your business by looking at what comes in (income) versus what goes out (expenses).

USE A PROGRAM TO MAKE IT SIMPLE. Use bookkeeping software like QuickBooks or income statement templates found via Google search.

ACT ON WHAT YOU SEE. Determine if investments (e.g., oninstrumentation) are paying off, and shift fundst to the most profitable purchases.

The profit and loss (P&L) statement is a basic tool that allows you to monitor the money your practice is generating against the money it has spent. Creating and using P&L statements is easier than you may think. Here is why a P&L statement is useful, how to create one and and how to use it to better manage your practice’s finances. When finances are fully understood, you can better formulate strategies that lead to profitability.

What is a P&L Statement?

A “profit and loss” statement, also known as an “income statement,” is one of three financial statements that can be examined to give a practice owner a better understanding of his/her business. Unlike the balance sheet, which is representative of a moment in time as in a photograph, the income statement represents a period of time, like a movie. The P&L statement shows the profits from the business (revenues) and the costs that were necessary to produce the aforementioned revenues (expenses). In short, it allows you to see the profitability of the business by looking at what comes in (income) versus what goes out (expenses).

What is the Purpose of a P&L?

Being able to examine a P&L statement provides the OD with the opportunity to examine where they may be able to increase revenue and decrease expenses or costs. As with all practice-management related numbers, it’s important for the OD-owner to be aware of what’s truly happening in the practice; how much money is being spent in what areas, and the amount of revenue coming in from various revenue streams. Identifying areas where the practice is over budget or under budget helps the OD maintain control of the practice direction. It is also possible to analyze any sudden increases in product returns and examine the cost of goods (COGS) sold compared to sales.

For the OD looking to purchase a practice, a P&L helps to highlight the financial viability of the practice, and to understand from where the practice’s revenues and expenses derive. Since an income statement by definition covers a period of time, they usually are produced quarterly, bi-annually or annually.

How Do You Create a P&L Statement?

If you’re going to create consistent income statements, first start collecting your financial data. If you’re not already tracking your COGS, taking inventory of your stocked items, or writing down your monthly expenses, start getting those things together first so that the statement will be easy to generate at the end of the quarter or year.
It’s relatively simple to generate an income statement. A quick online search produces several different templates that can be easily adapted to your practice. It’s also possible to quickly generate an income statement by using financial management software like QuickBooks.

From what I’ve seen, an income statement is not easily generated directly from electronic health record software. While each type of EHR keeps track of certain financial transactions, and can certainly help you input some of your profit- and cost-related numbers, it won’t have information like your last electric bill or payment to your cleaning service, for example.

Click HERE for downloadable income statement templates online that you can use to create your own.

Use to Track Finances

First, make a list of all of your revenues and expenditures. Here are the categories:

What Do You Include in Each Category?

Let’s consider a practice at the end of 2013 that had $500,000 in sales. This goes under sales on the left. However, there were $10,000 worth of returns, that leaves $490,000 in total revenues.
Their total inventory including stocked contact lenses, frames and accessories is $100,000. This is the cost of goods sold. There are four employees, each making $15/hour or $31,200/year. In October, the practice paid for all employees to attend a continuing education meeting, totaling $5,000. This is added to the staff or office salary expense, totaling $129,800. They are “expenses,” placed under office salaries on the right. The office is in a rented space at the expense of $1,500/month, making the yearly rent total $18,000 and the practice pays utilities totaling $600/month. Their total occupancy expenses total $25,200. During the spring and summer, the practice sponsored a baseball team, as well as ran ads in the town’s festival bulletin.

Total expense for these advertising opportunities, as well as a few others throughout the year, totaled $6,500, the marketing expense. The practice continues to pay $1,500/month in equipment expenses, totaling $18,000 for the year. General office overhead, including pens, paper towels, paper, staples, printer ink, etc., totaled $42,800 for the year. This leaves the total expenses at $322,300, which when subtracted from $490,000 in revenues, leaves over $167,700 before tax for the doctor’s salary, upgrades, etc. So, how does this practice stack up to where they should be?

It is widely believed that practice expenses should follow the general guideline below.

Let’s look at how this practice stacks up*:

*numbers are rounded for simplicity in this exercise, causing actual practice percentages to be close to 100 percent, but not exact.
Carefully examining this hypothetical practice’s expenses reveals that there are areas in which the practice could adjust its expenses to become more profitable. Most notable of these is in the cost of goods sold category. The practice came in under budget in marketing, occupancy and COGS. There is potential to take the 4 percent not spent on occupancy and marketing and re-appropriate it towards COGS, thus giving the capacity to generate increased sales revenue. This would also adjust the leftover/doctor’s take to 30 percent, thus reducing tax liability, as well.

Once you prepare a comparison like this for your practice, the brainstorming can begin on how and where to place your expenses. If you use a program like Quickbooks, you’ll be able to easily expand each category and delve into each expense more deeply. Just remember, if you’re looking at these statements monthly, there will be fluctuating expenses. If you sell a lot of glasses one month, anticipate a corresponding lab bill the next month. Overall, the income statement lets you manage your expenses, and thinking critically about it, helps you manage your cash flow so that the practice can continue to sustain itself.

Make Changes Based on P&L Findings

Once you start to see your practice numbers unfold in front of you, the possibilities for interpreting them are endless. Of course, we’d all like to bring more money in, but analyzing the money going out, and reducing it wherever possible, may help the practice, as well.

For instance, the hypothetical practice had $10,000 in returns. Where is this coming from? Are there too many remakes? Does the optical department need to reconsider the quality of the frames, sunwear or accessories they are selling?
Rent is a large expense, as well, and begs the question: once the lease expires, should the practice continue to rent or buy a building? This hypothetical practice also spends more than the recommended on staff. Should the owner avoid extra training next year to reduce this expense, or is the money spent on staff worth it?
As you can see, the particulars of these issues may be different for each practice, but essentially every single line item on the income statement can be analyzed in this way to minimize some expenses, strategically maximize others, and affect the net income in the way the practice owner desires.

Do P&L Statements on Regular Basis

I recommend monthly and quarterly income statements, with a compiled statement at year-end. This facilitates continued awareness of the practice’s expenses throughout the year, and allows the owner to create a forecast for the next year. Remember that monthly statements will not give an accurate picture necessarily, but they will help you become well-acquainted with your cash flow. It is wise to carefully analyze quarterly sales and expenses when planning, and plan large frame buying times, stocking of other materials and equipment purchases according to prior data. The yearly assessment will give the best overall view of how the practice is doing in terms of cash flow.

Need to Be Confident of Numbers

The practice owner needs to feel confident that the P&L has been put together accurately and that all the numbers are correct. Whether he/she needs to do that him or herself will vary practice to practice. As a word of caution, if the owner of the business does not have any idea what goes into the P&L and lets the office manager or other staff member complete the report, the door is left open for abuse, fraud or simple negligence. Even if the practice owner isn’t completing the report, he or she should know what one looks like, be able to ask intelligent questions and double check for inaccuracies. Practice owners should be consistently reviewing the P&L with or without their office manager, based on individual preference, to look for places where expenses can be reduced.

Resources

The Accounting Game: Basic Accounting Fresh from the Lemonade Stand, by Judith Orloff and Darrell Mullis
Financial Accounting for MBA’s Fifth Edition by Easton, Wild, Halsey, McAnally
Investopedia

Related ROB Articles & Videos

Annual Financial Review: Scrutinize Expenses, Fine-Tune Profits

ABC Accounting: Track and Manage Finances for Profitability

Practice By the Numbers: Track Your Key Expenses

Develop Varied Clinical Skills, Increase Your Value to a Practice

Melanie J. Denton, OD, FAAO, practices at several locations in the Asheville, NC, area. To contact her: melaniedenton@gmail.com.

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