2. 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

3. 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

4. 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

5. 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.

6. 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?

7. 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 ,000
Selling, general and administrative expenses ,000
Operating Earnings (EBIT) ,000
Interest Expense…………………………………………………... 9,000
Income before Taxes (EBT) ,000
Income Taxes………………………………………………………12,000
Net Income ,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)

8. 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

9. 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

10. 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

11. 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?

12. 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 ,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 ,000
Long-Term Debt……………………………… 50,000
Total Liabilities……………………….. 117,000
Owners Equity (stock)………………… ,000
Total Liabilities & Owners Equity ,000
=======

13. 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

14. 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

15. 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?

16. 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……………………………………………… ,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………………………… ,000
Cash received from sale of common stock………………………… ,000
Net cash provided by financing activities ,000
Net Cash Increase for the Year ,000
=======
From I/S

17. 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?

18. 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

19. 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.

20. 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

21. 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

22. Jobson Benchmarking Marketing
Your expenditures will also depend upon the age and goals of practice

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

24. Jobson Benchmarking
Source of sale
What do these numbers tell us?

25. Jobson Benchmarking
Returns & Return Rate

26. Jobson Benchmarking
COGS (Cost of Goods Sold)
ASP

27. 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

28. Jobson Benchmarking
New Patients

29. 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

30. 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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31. 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.

32. Questions?