Your medical practice’s profit and loss (P&L) statement (also known as an income statement) indicates its ability to create revenue and profit. Meanwhile, your balance sheet shows the practice’s financial stability and its ability to pay down debt. To keep your practice thriving, you need to put both of these statements to good use.

P&L statements

For medical practices that generate them regularly, P&L statements provide important monthly, quarterly and annual financial data that you and your leadership team should analyze. For example, monitor variations in revenue, expenses and profits. In addition, have your accountant help you compute your practice’s breakeven point, which is the point at which total cost and total revenue are equal.

Generally, expenses are itemized on P&L statements as either:

• Fixed (unrelated to patient volume), or
• Variable (directly related to patient volume).

By totaling the variable expenses and dividing them by patient volume for the period, you can calculate your “variable cost per patient.” Each patient encounter should have gross payments that exceed your variable cost per patient to contribute to your profit margin. In other words, your breakeven point should be relatively high. If you consistently find that reimbursement is lower than the variable cost per patient, investigate what might be causing this.

Balance sheets

Balance sheets broadly address three components: assets, liabilities and shareholder equity.  Let’s take a closer look at each:

Assets. Often, balance sheets list assets from top to bottom in order of how easily they can be converted into cash (liquidity). They’re usually split into 1) current assets (convertible to cash in one year or less), and 2) noncurrent or long-term assets (convertible to cash in more than a year).

Current assets typically include cash and cash equivalents, accounts receivable, inventory (such as durable medical equipment and supplies), and prepaid expenses like insurance, advertising or already-paid rent. Long-term assets usually include long-term investments and fixed assets such as equipment and buildings.

Liabilities. Liabilities include any money your practice owes to vendors, as well as rent, utilities and salaries. Current liabilities, like current assets, are due within one year, while long-term liabilities are due after a year or more.

Current liabilities generally include accounts payable, the current part of long-term debt due within the next 12 months, interest due and wages. Long-term liabilities typically include long-term debt, pension fund liability (the money your practice must pay into its employees’ retirement accounts) and deferred tax liability, which consists of taxes due that won’t be paid until future years.

Shareholder equity. This is defined as the residual ownership interest in a practice after deducting its liabilities. In fact, the aforementioned equation for assets can be stated as:

equity = assets – liabilities.

Keep the business profitable

Your medical practice is a business, and to run a successful business you need to understand your financial position. By regularly reviewing your P&L and balance sheet, you can make ongoing course corrections as necessary to ensure your medical practice stays profitable over the long term.

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