Financial Statements for Dummies

Course Objectives:

• Read basic financial statements • Understand key accounting terms • Identify critical metrics to manage a business • Review business trends that would trigger a course correction

What are Financial Statements?

• Financial statements give the reader a snapshot of the health of the business – Consider it the “Audiogram” of the business • Three primary reports to measure the business – Income Statement measures the profit or loss of the business – Balance Sheet displays the company’s accounts – Cash Flow Statement presents how the business used its cash

Who uses Financial Statements?

• Financial Statements provide fact-based information to: – Business owners – Management – Investors – Lenders (banks) – Suppliers – Auditors – Landlords – Potential acquirers – Lawyers – Government • Governed by statutory laws, regulations and ethical standards – GAAP: Generally Accepted Accounting Principles

Income Statement Highlights

• Shows total revenues less total expenses (Profit or Net Income) for a period of time • Used to assess the operating performance of the business – Comparisons to budget and/or prior year – Expenses can be compared as a % of revenue – The income statement can also be used to identify unplanned expenses • Layout of the income statement – Steps from top line (sales) to bottom line (net income) – Line items dictated by type of business: diagnostics, hearing aids, rehab., etc.

Income Statement Questions?

• How is revenue generated in a typical practice?

• What are some expenses of a typical practice?

• How can you improve the profitability of the practice?

Sample Income Statement

Audiology & Hearing Centers, LLC For the Year Ended December 31, 2009 Net Sales ………………………………………………………..1,200,000 Costs of Goods Sold…………………………………………… 850,000 Gross Margin 350,000 Selling, general and administrative expenses........................ 311,000 Operating Earnings (EBIT) 39,000 Interest Expense…………………………………………………... 9,000 Income before Taxes (EBT) 30,000 Income Taxes………………………………………………………12,000 Net Income 18,000 Net Profit or (Loss)

Cash versus accrual accounting

• Business owners choose which method they will use to track income and expenses • Cash method is simplified accounting following cash transactions – Income is not counted until cash is actually received – Expenses are not recorded until actually paid – More common with smaller businesses due to simplicity and alignment with many IRS tax rules • Accrual method is more complex and is based on transaction date – Income is recorded at the time of the order or fulfillment of a service – Expenses are provided for when items are received – More theoretically accurate

Balance Sheet Highlights

• Shows total balances of a company’s assets, liabilities, and shareholder’s equity accounts at a point in time • Assets are what the company owns • Liabilities are the debts of the company • Shareholder’s Equity is the remainder of assets minus liabilities and represents the accounting net worth of the business • For most businesses, a balance sheet is only prepared at the end of each month, quarter or year

Current and long-term accounts

• Assets and liabilities are broken down between current and long term • Current Accounts are “liquid” assets that are available up or debts that are expected to be paid within a short time period (usually a year) • Long-term Accounts are assets or debts that are expected to remain in the business for longer than a year • Working Capital is the difference between current assets and current liabilities

Balance Sheet Questions?

• What are examples of some current assets of a practice?

• What are examples of potential current liabilities of a practice?

• How about long term assets and liabilities?

• How can you tell if a practice is solvent?

Sample Balance Sheet

Audiology & Hearing Centers, LLC at December 31, 2008 Assets Liabilities & Owners Equity

Current Assets Cash…………………………………………………34,000 Accounts Receivable……………………….80,000 Hearing aid Inventory… ………………170,000 Total Current Assets 284,000 Current Liabilities: Short-Term Debt……………………………20,000 Accounts Payable…………………………..35,000 Other Accrued Liabilities………………. 12,000 Total Current Liabilities 67,000 Fixed Assets (property, equipment) Equipment…………………………………….. 40,000 Less Accumulated Depreciation…..…(4,000) Long-Term Debt……………………………… 50,000 Total Liabilities……………………….. 117,000 Owners Equity (stock)…………………. 203,000 Total Assets……………………………………..320,000 ====== Total Liabilities & Owners Equity 320,000 =======

Cash Flow Statement Highlights

• Shows the sources and uses of cash in a business over a period of time • “Cash is King” – Profitable companies can go bankrupt if they don’t manage cash flow • Cash flow statements are broken down into three sections – Cash flows from operating activities, starting with Net Income – Cash flows from investing activities – Cash flows from financing activities • Ends with the “change in cash” at the bottom of the statement

How Cash Flow Works

• Cash flow is the movement of money in and out of the business • Inflows are likely the result from the sale of goods and services to your customers or selling assets or equity • Outflows are the result of paying expenses and making investments in your business

Cash Flow Questions?

• How is cash flow generated from the operations of a practice?

• What are some ways to improve your cash flow position?

• How is cash flow different from profit?

Example Cash Flow Statement

Cash Flows from Operating Activities:

Net Income:…………………………………………………………………………………… 18,000 Add (Deduct) items not affecting cash flow Depreciation Expense…………………………………………………………………. 4,000 Increase in A/R………………………………………………………………………….. 80,000 Increase in merchandise inventory………………………………………… 170,000 Increase in current liabilities……………………………………………….. 67,000 Net cash used by operating activities (161,000)

Cash Flows from Investment Activities:

Cash paid for equipment………………………………………………………… (40,000)

Cash Flows from Financing Activities:

Cash received from issues of long-term debt………………………… 50,000 Cash received from sale of common stock………………………… 190,000 Net cash provided by financing activities 240,000

Net Cash Increase for the Year

From I/S 39,000 =======

Key Performance Indicators

• Key Performance Indicators (KPIs) are measures that help define the success of a business – Focused on the long-term goals – Measure the business drivers • KPIs may include financial and non-financial data • KPIs should be S.M.A.R.T

• What are some KPIs for a typical practice?

Practice Owner Roles

Planner, lives in past, rules, counts Lives in the future, has dream The Doer, lives in present, follower

Tracking, Benchmark Metrics, Measures & Ratios

• What are the benefits of measures and benchmarks – Financial statements don’t provide all the information.

– Provides you with information needed to run business • Which benchmarks and ratios (KPIs) should be used?

• What are the benefits of tracking and dashboards?

• Which systems are available to accomplish this measurement?

• What is the roadmap to success?

What benchmark do I use?

Jobson Medical Benchmarking Survey:

• Survey of hearing healthcare practices across the U.S.

• Series of questions designed to establish and evaluate basic industry metrics and establish best practice benchmarks • Goal is to develop a statistically valid metric for performance metrics that may be used by individual practices to provide tools for improving quality, productivity, and growth • Other sources include AAA, ADA, Market Trak Studies, Private Practice Peers

Jobson Survey – KPI’s • Private Practice Productivity

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One of the most important measures How productive is your time Spend more time fitting, less on administration

Jobson Benchmarking • Marketing

Your expenditures will also depend upon the age and goals of practice

Telephone Inquiry Conversion Most practices claim good success at converting telephone inquiries into fitting appointments.

Jobson Benchmarking • Source of sale

What do these numbers tell us?

Jobson Benchmarking • Returns & Return Rate

Jobson Benchmarking

• COGS (Cost of Goods Sold) • ASP

• Gross margin

Jobson Benchmarking

• Gross Profit/Sales = Gross profit Margin • Need to consider cost structure and income goals • Pricing is one of your most important decisions • Goal is to maximize profits and cash

• New Patients

Jobson Benchmarking

Systems: Tracking & Dashboards How you operate your business is as important as what you do in it.

• Benefits of tracking and dashboards • Provides a snapshot of health of your business • Provides key measures and goals for your staff • Can tailor to your overall business goals and strategies • Systems •

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Roadmap to Success

• It is the way of doing business that transforms any small business from chaos to order, which creates excitement and growth. • It is a proprietary way of doing business that successfully differentiates every extraordinary business from every one of its competitors. • Strong understanding of financial statements, benchmarks, metrics and measures will provide clear direction and a roadmap to business success.

Questions?