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 The Income Statement is a reflection of all Revenues and Expenses for the current year; in other words, the company's profitability. The bottom-line number is Net Profit, which = all Revenues less all Expenses. The Net Profit total of the Income Statement flows to the Balance Sheet as the total of Current Year Profits in the Net Worth section.  At each year-end, the Income Statement zeros out to begin a new year.  On the Balance Sheet, the current year profit in the Net Worth section transfers to the Retained Earnings total and the current year profit value goes back to zero for the start of a new year.  If you're confused, read this a couple times and you'll get the hang of it.  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?

Liabilities & Owners Equity Sample Balance Sheet Audiology & Hearing Centers, LLC at December 31, 2008 Assets Current Assets Cash…………………………………………………34,000 Accounts Receivable……………………….80,000 Hearing aid Inventory… ………………170,000 Total Current Assets 284,000 Fixed Assets (property, equipment) Equipment…………………………………….. 40,000 Less Accumulated Depreciation…..…(4,000) Total Assets……………………………………..320,000 ====== Liabilities & Owners Equity Current Liabilities: Short-Term Debt……………………………20,000 Accounts Payable…………………………..35,000 Other Accrued Liabilities………………. 12,000 Total Current Liabilities 67,000 Long-Term Debt……………………………… 50,000 Total Liabilities……………………….. 117,000 Owners Equity (stock)…………………. 203,000 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 39,000 ======= From I/S

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?

Manager Visionary Professional Practice Owner Roles Manager Visionary Planner, lives in past, rules, counts Lives in the future, has dream The Doer, lives in present, follower The biggest problem for practice owners is failure to understand the different roles you have in your daily activities. Whether you are managin a department or you own your own practice, You ARE the business like it or not and its faults rest squarely on your shoulders. If it is left up to you, you will die slowly in a smoldering heap of depression and foreclosure. If this is to change, you must learn to master the three roles. You can almost think of them as 3 entirely different positions in your company, but the challenge is, you have to work all three roles... First you have the Visionary – The visionary lives in future, has a dream and a vision of what the practice will look like, hates the details of running the practice, the visionary gives the practice is creative spark Next you have the Professional – The Doer, this role lives in present, finds control in seeing patients, doesn’t have time to think, after all you are so busy and so good at what you do when seeing patients how can you find time to think about the future or the past, without the Professional you have no service or value to offer patients, but if the Professional takes over, you practice will lack business development and structure. And finally the Manager –The planner, this role lives in past, counts and organizes nuts and bolts without rhyme or reason, creates more rules until the day you decide to quit the practice, without the manager, your practice will lack structure You should notice that the professional is highlighted in Red. That is because most of us have fully developed the professional in us. We don’t really need work here (if you feel you do, don’t worry we will get to it!), we need to develop the visionary and manager in us to reap the benefits of success. Professional

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? How do you measure the success of an audiology practice? Measure your success by more than just the bottom line. Identifying profit does not identify specific areas for improvement Are there specific areas of audiology we should measure? Binaural rate, customer satisfaction, return rates average selling price and cost of goods sold Calls to appointments What systems in place to measure, track and benchmark How do measure and metrics help me run my business Improve your training and employee confidence by offering a roadmap to do the job correctly Improve your consistency of service by leaving less to your employees' judgment Increase company's chances of being successful.

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 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

Jobson Benchmarking Gross margin 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

Jobson Benchmarking New Patients

Benchmark Ratios Ratios: Debt to Assets Ratio = Total Liabilities Total Assets High ratio indicates dependence on borrowed money Profit Margin on Sales = Net Profit (income statement) Sales Represents amount of each dollar that is profit

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 ..\..\..\..\Advanced Financial-Benchmarking Assessment_100608 1 (2).xls ..\..\..\..\Front Desk OPP Sample_101707.1.xls ..\..\..\..\Provider OPP Sample_101707.1.xls ..\..\..\..\Sycle Screen Shots.xls

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?