In this game you need to put the tiles together to construct a stained glass. There's only one rule: when two tiles touch each other, the colors of the touching sides of the tiles must be the same. There are a total of 3 stages, with increased number of tiles for each new level. Use your mouse to drag and place the tiles.
Accounts Receivable: Money owed to you by clients or other payers for services you have performed. Accounts Receivable is a current asset that can be found on your Balance Sheet.
Assets: The total resources with monetary value owned by an individual or a business. They include things such as cash, stocks and bonds, real estate equity, money you are owed, and any property that could be sold. Assets can be found on your Balance Sheet.
Balance Sheet (also known as statement of financial condition or statement of financial position): An itemized financial statement that lists assets, liabilities, and equity. A Balance Sheet represents your practice's overall financial position at a given point in time.
Current Assets: Assets that are expected to be turned into cash, sold, or consumed during the coming year. Current Assets include cash, accounts receivable, short-term investments, inventory, and prepaid expenses. Current Assets can be found on your Balance Sheet.
Current Liabilities: Amount to be paid within one year for salaries, accounts payable, interest, and other debts. Current Liabilities can be found on your Balance Sheet.
Depreciation: The amount of expense allocated during a specific time period for certain types of assets that lose their value over time - for example, building and equipment. Depreciation helps a business reduce its taxable income by writing off the cost gradually over the life of the asset. It is an accounting expense, meaning that it is not an expense requiring an outlay of cash. Depreciation can be found on your income statement.
Equity: The amount of your practice's total assets you actually own (i.e., not financed with debt). Depending on the legal model and ownership of your practice, equity may be referred to as net assets, shareholder's equity, or proprietor's net worth. Equity can be found on your Balance Sheet.
Expenses: The costs associated with providing services and running your practice over a period of time. Expenses can be found on your income statement.
Fixed Assets: Long-term assets that are not expected to be turned into cash, sold, or consumed during the coming year. Fixed Assets include buildings, land, equipment, and certain types of furniture. Fixed Assets can be found on your Balance Sheet.
Income Statement (also known as statement of operations, profit and loss statement, or statement of earnings): A financial statement that shows your revenues, expenses, and profit over a specific period of time.
Long-term Liabilities: Amounts owed for debts that will not become due for at least one year. Long-term Liabilities can be found on your Balance Sheet.
Marketable Securities: Stocks, bonds, and other investments that have enough demand to be converted to cash or sold quickly. Information about marketable securities can be found on your Balance Sheet.
Net Accounts Receivable: Total accounts receivable, minus an estimate for uncollectables. Accounts Receivable can be found on your Balance Sheet.
Net Income: The difference between total revenue and total expenses. Net Income is the same as Net Profit and reflects your revenues adjusted for the cost of running your practice, depreciation, interest, taxes, and other expenses. Net Income can be found on your income statement.
Non-Operating Revenue: Revenue generated by things that are not directly related to the services you offer. Non-operating revenue includes things such as interest income, gains and losses, and other non-operating transactions. Non-operating Revenue can be found on your income statement.
Operating Revenue: Revenue generated from the day-to-day operations of your practice. Operating Revenue can be found on your Income Statement.
Profit (also known as net income or earnings): The amount of money your practice makes after paying operating expenses, taxes, and other current expenses. Profit can be found on your Income Statement.
Revenue: Money collected or that you expect to collect for providing services. Revenues can be found on your Income Statement.
Total Assets: The sum of your practice's current and fixed assets. Total Assets can be found on your Balance Sheet.
Total Liabilities: The sum of your practice's current and long-term liabilities. Total Liabilities can be found on your Balance Sheet.
Total Revenue: Sum of operating and non-operating revenue. Total Revenues can be found on your Income Statement.
Uncollectibles: An account that cannot be collected because the client or payer is not able or willing to pay. For financial calculations, such as Days Cash on Hand, consider using an estimate of uncollectibles based on historical data about the average percent of receivables you are typically unable to collect.
By Corporate Relations and Business Strategy Staff
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Making good use of resources is a key component in building a successful practice. Reining in office expenses is often a matter of working smarter, not harder. By thinking creatively, making the most of available resources and maximizing efficiency, practitioners can reduce expenses that cut into their profits.
This article outlines eight tips for trimming office expenses. Several of the tips below include suggestions from practitioners who responded to a call for cost-cutting tips from the last issue of the PracticeUpdate E-Newsletter.
Set and Follow a Budget
Create a detailed budget for your practice and stick to it. The starting point for reducing office expenses is to take a close look at your financial records, including your income statement, and determine whether, and where, changes are needed. Be sure to keep a record of your expenses every month and look for places where you could cut back. It is important to budget and plan for larger purchases and to periodically review the financial health of your practice.
Evaluate Your Rent or Mortgage Expenses
Office expenses represent a significant expenditure for most practitioners. Consider whether you can justify your costs in this area. Margaret Norris, PhD, a psychologist in independent practice in College Station, Texas, says that having a large office in a high-rent district doesn’t necessarily translate into increased income. She touts the benefits of having a less sizeable office in a well-managed building, in a location that is easily accessible to clients. “I could be spending twice as much in rent and I don't believe it would produce any more income than what I earn now,” says Norris.
Setting up a home office where you can handle administrative tasks can significantly reduce your overhead costs. Similarly, some psychologists find that they can see clients in an office connected to their residence. In both cases, you may be able to claim tax deductions for your use of the space.
Carol Lee Hilewick, PhD, a psychologist in private practice in Silver Spring, MD, has significantly cut back on expenses by having a home office. “In a high-cost area like Washington, DC, having an office of any size or quality can eliminate most profits,” says Hilewick. “The best thing I did to save money was to purchase a two-story home. I live upstairs, and the downstairs, which is above-ground, is dedicated to my office space. The layout is that of a professional office, which has a totally separate entrance.” Hilewick adds that while this arrangement offers benefits, she is careful to set up boundaries with her clients and to separate her professional life from her home life.
Seek out Better Rates for Communication Services
Are your local and long-distance telephone plans a drain on your budget? If so, call your carrier and ask about less expensive service rates and plans.
Holly A. Hunt, PhD, a psychologist in private practice in Long Beach, California, suggests calling telephone, cellular, paging, and Internet companies periodically to inquire about the availability of less expensive plans. “Companies are constantly competing with each other and generating new service plans and better rates,” says Hunt. “Even if you don't get all of your fees reduced when you call, you are likely to get some discounts. And if you don't periodically ask, you can be sure your rates will never change.”
An important reminder about phone expenses: Don’t forget to use toll-free phone numbers for third-party payers and other vendors whenever possible to save on long-distance charges.
Don’t Pay Full Price for Office Equipment
When making large purchases such as office or computer equipment, (secure document, requires login) shop around for the best deal. Purchasing a multifunction machine that can fax, copy and print can serve multiple needs and reduce your expenses. Hilewick saves money by purchasing office equipment such as copiers, fax machines and printers from a business equipment company that sells lightly used equipment. “My supplier always refurbishes the equipment and provides a warranty,” says Hilewick. “In this way, I can get a $6,000, robust, multi-featured copier for about $1,000.”
Maximize Your Tax Deductions
Talk to your accountant about ways to maximize your deductions for business expenses. Eligible expenses may include business property expenses, health insurance costs, retirement plan contributions and business expenses such as professional memberships and journal subscriptions.
“Keep excellent business records,” advises Valerie L. Shebroe, PhD, a psychologist in East Lansing, MI. “Use a business credit card and business checkbook for ease of keeping business expenses separate.” Tip: Read “Making the Most of Your Accountant” to review economical and money-saving ways that a good accountant can be an asset to your business.
Review Your Staffing Needs
Periodically review your staff’s performance and salaries. Do you have the right person in the right job? Are staff members working efficiently? If you have an employee who is underperforming, work with that individual to create a plan for improvement. Although staffing costs can be a significant expense, the effective use of administrative support (secure document, requires login) can influence your ability to generate revenue, work more efficiently and provide better customer service. Consider, for example, whether having one higher-paid staff position or using multiple part-time staff positions better meets your needs.
Rethink — Don’t Eliminate — Your Marketing Efforts
When it’s time to cut back on practice expenses, you may be tempted to target your marketing budget. However, cutting expenses that generate referrals and income for your practice can have a negative effect on your bottom line.
Instead of eliminating marketing, it may be time to reassess your marketing efforts or consider changing your marketing approach. For example, you may want to consider bolstering your efforts and activities such as community involvement (secure document, requires login) or networking. (secure document, requires login) Tip: Review "Low-cost Ways to Market Your Practice.” (secure document, requires login)
Maximize Your Practice’s Efficiency
The more efficient your practice is, the more time you have to devote to clients and to building your practice. Take a close look at your various office processes, from billing to scheduling client appointments to making referrals, and look for ways to make them more efficient and cost effective.
- Evaluate your scheduling. Are you making the most effective use of your office hours? If you find that you are regularly paying office overhead at times when you have no appointments scheduled, consider changing your office hours to better fit the needs of your clients and avoid spending money on utilities, staff and other expenses at times when you are not generating revenue.
- Collect copays at the time of the appointment. Collecting 100 percent of copay amounts from clients at the time of service can reduce the amount of time and resources you spend following up later.
- Use technology effectively. Consider whether you could increase your efficiency, or even reduce your practice expenses, with new practice management software or a new electronic billing service provider. Read more about practice technology. (secure document, requires login)
- Eliminate wasted postage costs. Are you losing money on postage? When you are mailing promotional materials, be sure to target the appropriate audience. (secure document, requires login) When you pay bills, you may be able to save money on stamps by paying the bills electronically. Many banks now offer free online bill-paying for account holders. Before you submit bills and invoices, it is a good idea to review them for accuracy. This can save you time and money in the long run.
- Maximize use of your office space. Do you rent or own office space (secure document, requires login) but only use it a few days a week? Considering sharing the cost of your office space, your support staff, and your utilities with another practitioner on the days you are out of the office. Bringing another psychologist on board who offers complimentary services can provide a broader range of services to the community. Do you have more space than you need? If so, consider finding ways to use the space to generate revenue or consider downsizing.
When it comes to running a practice, some expenses are unavoidable. Practitioners who make an effort to use their resources effectively and to follow a budget can get the most value for their money and protect the financial health of their practice.
Share Your Tips
Do you have additional tips for trimming office expenses? Send your suggestions for ways — both large and small — that practitioners can reduce costs.
By Communications and Corporate Relations and Business Strategy Staff
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Many practitioners rely on their accountants' expertise for generating financial statements and preparing tax returns. Yet some psychologists may not take full advantage of the range of accounting services that can help practices thrive. This article touches on economical and money-saving ways that a good accountant can be an asset to your business.
The availability of computers and user-friendly financial software makes it increasingly easy to manage your practice finances yourself. In the long run, however, effective use of an accountant can pay dividends.
A good accountant will do more than simply keep track of receipts and balance the checkbook. In addition to offering professional guidance about how certain items should be classified when creating financial statements, your accountant will analyze and interpret financial data and generate information essential to tax preparation, strategic decision making and financial planning.
You can keep costs manageable by doing the simple bookkeeping and document preparation yourself. Ask your accountant to train you, a member of your staff or a part-time bookkeeper and advise you regarding the best record keeping formats to use. Creating and adhering to an organized record keeping system will reduce the amount of time your accountant will need to spend sorting through financial records and searching for necessary documentation.
Keep good records of all financial transactions, provide your accountant with complete and accurate books and well-organized receipts, and automate as much of your financial data as possible using online banking and financial software.
There's a "bottom line" benefit to using these solid financial practices: they will reduce the amount of time your accountant will bill you for.
As with bookkeeping, available computer technology (secure document, requires login) has made it easier to prepare and file your own tax return with minimal cost. Except in cases where practice finances are extremely straightforward, however, using an accountant to prepare your tax forms may be advantageous for several reasons.
Although it will certainly cost more to use an accountant to prepare your tax statements instead of doing them yourself, those expenses often are recouped as a result of tax savings and deductions that would have gone unrecognized if not for the accountant's expertise in complex tax law and knowledge of rules and exceptions that often change yearly.
In addition, working with an accountant can help minimize costly filing errors. And in the unfortunate event that you get audited, an accountant will be able to advise you regarding the best way to present your case.
Beyond preparing your documents at tax time, your accountant can suggest tax-saving strategies throughout the year. Frequent tax law changes often make the timing of certain expenses and deductions important.
For example, if you are considering donating your old automobile, your accountant might advise you to donate it before the end of the year, so you may be able to take advantage of a larger deduction that will be limited beginning the following year. Other changes related to deductions for office equipment, structural improvements to office space,and the deductibility of sales tax versus state income tax may result in tax benefits that put more money in your pocket if you take advantage of them at the right time.
Talk to your accountant about how current opportunities and impending changes in tax law may influence your business decisions.
Strategic Business Planning
Far from simply being a "bean counter" a good accountant can be a trusted business advisor. Be open and honest with your accountant and make sure he or she is intimately familiar with the business operations of your practice. Knowing your professional and financial goals will allow your accountant to offer concrete suggestions for how to achieve your goals.
A good accountant also can help you create a solid business plan, take full advantage of your practice's strengths, determine the most advantageous business structure (secure document, requires login) for your practice, use your resources more effectively and manage revenues and expenses in a way that improves your bottom line.
If you are thinking about selling your practice, (secure document, requires login) doing estate planning or applying for a business loan, your accountant can assist you in determining the value of your practice.
Your accountant also can help you analyze your business operations, identify problems and suggest possible solutions. Areas to explore with your accountant might include:
- Billing, collections and cash flow
- Staffing and compensation
- Budgeting and financial projections
- Return on investment analyses for new technology or marketing approaches you are considering
- Payer mix and reimbursement rates
- Establishing mechanisms to monitor financial performance
Talk to your accountant about any major financial decisions related to your practice. Whether you are thinking about buying new computer equipment, (secure document, requires login) deciding whether to lease or buy office space, (secure document, requires login) or planning a major business trip that you want to combine with a family vacation, your accountant can help you consider the various options, as well as their financial impact and tax implications. Your accountant also can help you establish internal financial controls and financial risk management strategies to help protect your practice.
Although you should not intermingle your personal and business finances, as a business owner, the two are closely connected. An accountant familiar with your practice is well positioned to offer guidance on personal finance topics such as retirement planning, long-term care insurance, wills and trusts, estate planning, personal asset protection and investment strategy.
As with any practice consultant, choose your accountant wisely. Find a qualified professional whose expertise matches your needs and who offers more than just number crunching.
Using an accountant to your best advantage is one more tool to help you grow and run a successful practice.
Learn more about managing your practice's finances.
By Corporate Relations and Business Strategy Staff
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A past issue of the PracticeUpdate e-newsletter included an article with key ratios to help you assess your practice's financial status. While informative, such an analysis doesn't necessarily help you understand how your operations affect your practice finances.
Analyzing operating data for your practice goes a step further and helps explain your performance, so you can make adjustments and implement strategies to strengthen your finances as needed.
As with your financial ratio analysis, begin by gathering relevant data from the past three years. Most of the data you need to analyze your operations —such as the mix of professional services you provide and insurance payers you use, along with productivity measures— will come from your practice management records, rather than from your financial statements.
Once you have compiled this information:
- Calculate the operating indicators listed below, using the same time interval (e.g., annual, quarterly, monthly) you used in your financial analysis.
- Look for changes and trends. Long-term patterns or gradual changes are often easier to identify visually, so it may be helpful to use a chart or graph.
- Pinpoint indicators that look problematic and think about how can you address these problem areas and make improvements.
- Once you have examined the historical data, start tracking these indicators on an ongoing basis to monitor your practice operations over time.
Although there are many operating variables you can explore, the following examples may be particularly helpful to track.
PAYER MIX: Break down the percentage of your total payments, the percentage of your total revenues and the percentage of your total clients by payer. For example, do Medicare clients make up 30 percent of your total client base, do 17 percent of your total revenues come from payments from a particular managed care contract, or are 61 percent of your total payments from private pay clients?
Having a larger percentage of clients or payments coming from a source with higher reimbursement rates is good for your practice finances. Conversely, growing segments from lower paying sources can put a dent in your revenues.
Just like investing, however, you should diversify your revenue sources. This will buffer you in the event of unforeseen changes, such as losing a contract, getting dropped from a panel or having a particular payer drastically reduce reimbursement rates or no longer cover a particular service.
Percentage of Total Payment = (number of payments from each payer / total number of payments) x 100
Percentage of Total Revenues = (net revenue from each payer / total net revenue) x 100
Percentage of Total Client Base = (total number of clients from each payer / total number of clients) x 100
SERVICE MIX: Look at the percentage of your time and revenues broken down by service type, such as individual therapy, group therapy, assessment, consultation and expert witness work. This will help you better understand how you are spending your time and what percentage of your total revenue comes from each type of service you provide.
Don't forget to include administrative time for each activity in your calculations. A service that pays $200 per hour might not seem so lucrative if you realize that you spend seven unbillable hours on administrative work for each billable hour.
Percentage of Time = (total hours spent on a particular type of service / total number of hours worked) x 100
Percentage of Revenues = (net revenue generated by a particular type of service / total net revenue) x 100
OTHER OPERATING VARIABLES: You might also want to calculate and track variables such as:
Average Length of Treatment = total number of sessions for all discharged clients / total number of discharges
Total number of sessions or units of service per year, month and week
Percentage of Cancellations = (total number of cancellations / total number of scheduled sessions) x 100
Percentage of No-Shows = (total number of no-shows / total number of scheduled sessions) x 100
Percentage of Referrals by Referral Source = (number of referrals from each referral source / total number of referrals) x 100
Client Mix Percentage = (number of clients with a particular primary diagnoses or core issue / total number of clients) x 100
You can calculate many of these operating variables by payer and client mix. For example, you might compute average length of treatment or percentage of cancellations and no-shows for each payer and for each primary diagnosis.
A couple of additional considerations reflect your practice setting:
- If you operate a larger practice with multiple health professionals, you can gain a better understanding of how the practice is functioning by also tracking the "other operating variables" listed above as well as percentage of total revenues generated by each professional.
- If based in an institutional setting such as a hospital or university counseling center, even though you may not have access to financial data, it should be feasible to track the percentage of your time spent delivering each type of service and the "other operating variables" listed above.
Visit the Practice Finance section for further financial related material.
By Corporate Relations and Business Strategy Staff
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Practicing psychologists are increasingly turning to the Internet to conduct a wide range of business activities, from claims processing to marketing their practice. One online business activity that is growing in popularity is online banking, or using a computer to access financial account information and perform banking transactions through a financial institution’s secure website.
This article outlines potential benefits as well as recommended precautions related to online banking.
Benefits of Online Banking
Being able to quickly and easily access account information and conduct banking transactions can offer practitioners more time to spend with clients or addressing other business matters. Because financial transactions are posted online as they occur, practitioners can easily track and monitor their account activities, which can aid in budgeting and financial management.
In addition, online banking can offer cost savings by eliminating the expenses associated with paper bill paying. Additional savings may results from discounted prices for online services that some banks are offering to attract customers.
A Range of Services for Practitioners
Online banking services vary by financial institution, but many banks offer the following options that may be of particular interest to practitioners:
- Pay bills online. Use this service to review and pay bills from your online account. This relatively quick and easy procedure allows you to access and track your payment history with specific vendors and also saves you the cost of postage and checks. Some payees can even send electronic bills, relieving you of the hassle of processing paper statements. You may also be able to arrange for automatic payment of a variety of bills on particular days of the month, as well as schedule payments ahead of time when you plan to be away from the office to ensure that your bills will be paid in your absence.
- Download your online account information, including a detailed transaction history, into financial management software, such as Quicken, QuickBooks or Microsoft Money, or spreadsheet software. This service can help you to quickly and easily reconcile your accounts without having to manually enter each transaction.
- Request automatic notification. For example, you may request to be notified via email if your account balance goes above or below a specified amount. This can help guard against overdrafts or warn you about suspicious account activity.
- Conduct standard banking transactions over the Internet. For example, you may request that the bank stop payment on a check or order new checks via e-mail, instead of having to call or visit the bank. In addition, you may access and transfer funds among multiple accounts, both business and personal, view and print your account statements and view images of paid checks.
Some banks offer special online banking packages designed for small businesses. Depending on your banking needs and the services offered, you may want to consider a small business account for your practice. Services may include the option to pay your employees electronically through direct deposit and electronic payment of federal, state and local taxes.
How Much Does Online Banking Cost?
Many banks offer online banking services and electronic account statements at no cost, if you meet a qualifying account balance or you open a particular type of account that offers online banking as a benefit. Check the details of online banking packages so you are aware of fees that may be applied to particular services.
When considering online banking services, it is important to find out:
- if there is a charge for setting up or closing an account, as well as any related technical requirements
- whether special software or hardware is required, and the related costs. Typically, setting up an online banking account is a fairly quick and easy procedure that requires only a computer and an Internet connection
- how to correct errors you might make — such as paying a bill twice by mistake or entering the wrong payment amount — and any fees associated with these types of errors
Is Online Banking Safe?
Online banking uses encryption, a form of invisible coding, as well firewalls, to protect your information from third parties. Typically, a password and personal identification number are required to log in to an online bank account. Most banks offer additional protections, such as automatically logging you off the site after several minutes of inactivity or when you leave the site without logging out of your online bank account.
Reputable banks have security measures in place to secure the personal and financial data stored in online accounts. However, data security is a serious concern for both banks and consumers, especially following a reported rise in identity theft over the past few years. Banks are constantly challenged to implement anti-fraud measures to protect financial accounts from a host of potential security breaches, ranging from the theft of printed bank statements from mailboxes to the unauthorized use of stolen ATM debit cards.
If you decide to bank online, some steps that you can take to help safeguard your online account information include:
- Access your account only from a trusted computer using a web browser that supports online banking encryption technology (this includes most current browsers, including Internet Explorer 6.0). Make sure the browser’s security and cookie settings are adjusted appropriately for your protection. In addition, make sure the computer has current virus protection and a firewall installed (secure document, requires login) and enabled to help block unauthorized users from accessing the computer.
- Use a password that contains at least six characters and a mixture of letters and numbers. It is a good idea to use a password that you do not use for other online accounts, and to change the password every one to two months.
- Monitor your account for signs of suspicious activity.
- Never respond to unsolicited e-mails or phone calls requesting personal financial information or your social security number — even if the person requesting the information claims to be from your bank. Computer hackers may use so-called “phishing” tricks to persuade consumers to reveal their online bank account numbers and passwords.
Visit the Federal Trade Commission website for more information about protecting your personal information.
Weighing Your Options
In researching your online banking options, start by finding out what services your current bank offers. Many banks offer free demonstrations of their online services through their websites or local branches.
Before signing up for online banking services, consider the following questions:
- Do you understand the features that are available and the costs associated with each service that you might use?
- Can the bank confirm that online transactions are processed in a timely manner?
- Does the bank offer a guarantee that covers unauthorized charges to your account that may a result from a banking error or security breach?
- Does the bank offer adequate customer service? When you need assistance, will you be able to communicate directly with a bank representative by e-mailing, calling or walking into a local branch? Are representatives available during convenient hours, and will they respond quickly to your concerns?
Online banking is an increasingly popular tool that can help psychologists effectively manage the administrative demands of running a practice. It can save practitioners both time and money and can streamline the financial management of the practice. In considering whether to incorporate online banking services into your practice, focus on identifying and finding the services that best meet your needs and the needs of your practice.
PLEASE NOTE: The service providers and products mentioned here are provided simply as examples and do not constitute endorsements by the APA Practice Organization. There are other similar products and services available that are not identified in this article.
By Corporate Relations and Business Strategy and Communications Staff
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Understanding the different types of financial documents and the information each contains helps you better understand your financial position and make more informed decisions about your practice. This article is the first in a series designed to assist you with making sense of your practice's financial statements. In this issue, we start with your balance sheet.
Some practitioners are more familiar with financial terminology than others. You may find it helpful to consult a glossary of financial terms as you read this article. And though the subject of finances is tedious for many health professionals, it is crucial to be informed and to monitor the financial pulse of your practice.
Balance Sheet Basics
Your balance sheet (sometimes called a statement of financial position) provides a snapshot of your practice's financial status at a particular point in time. This financial statement details your assets, liabilities and equity, as of a particular date. Although a balance sheet can coincide with any date, it is usually prepared at the end of a reporting period, such as a month, quarter or year.
A sample balance sheet for the fictitious Springfield Psychological Services at December 31, 2004 and 2003 is presented below, as an example.
The layout of a balance sheet reflects the basic accounting equation:
Assets = Liabilities + Owners' Equity
with assets listed on the left side and liabilities and equity detailed on the right. Consistent with the equation, the total dollar amount is always the same for each side. In other words, the left and right sides of a balance sheet are always in balance. Note: Some balance sheets do not use the left-right format and instead list assets on top, followed by liabilities and then equity.
Assets are the things your practice owns that have monetary value. Your assets include concrete items such as cash, inventory and property and equipment owned, as well as marketable securities (investments), prepaid expenses and money owed to you (accounts receivable) from payers. Assets also include intangibles of value, like patents or trademarks held.
On a balance sheet, assets are listed in categories, based on how quickly they are expected to be turned into cash, sold or consumed. Current assets, such as cash, accounts receivable and short-term investments, are listed first on the left-hand side and then totaled, followed by fixed assets, such as building and equipment.
The portion of equipment cost that is estimated to have been used up, based on the equipment's estimated useful life, may be subtracted from fixed assets in the form of accumulated depreciation to calculate net property and equipment. Note: Various ways to calculate depreciation can have different tax implications. Talk to your accountant or financial advisor to make the most appropriate decisions for your practice.
Finally, total assets are tabulated at the bottom of the assets section of the balance sheet.
Liabilities reflect all the money your practice owes to others. This includes amounts owed on loans, accounts payable, wages, taxes and other debts. Similar to assets, liabilities are categorized based on their due date, or the timeframe within which you expect to pay them.
Current liabilities are generally due within a year of the balance sheet date and are listed at the top of the right-hand column and then totaled, followed by a list of long-term liabilities, those obligations that will not become due for more than a year.
Owners' equity (sometimes called net assets or net worth) represents the assets that remain after deducting what you owe. In simplified terms, it is the money you would have left over if you sold your practice and all of its assets and paid off everything you owe. Note: Valuing a practice can be extremely complex. Owners' equity does not necessarily represent current market value and therefore should not replace a comprehensive valuation by an expert when considering buying or selling an existing practice.(secure document, requires login)
Depending upon the legal structure of your practice, (secure document, requires login) owners' equity may be your own (sole proprietorship), collective ownership rights (partnership) or stockholder ownership plus the earnings retained by the practice to grow the business (corporation).
Total liabilities and owners' equity are totaled at the bottom of the right side of the balance sheet.
Remember —the left side of your balance sheet (assets) must equal the right side (liabilities + owners' equity). If not, check your math or talk to your accountant.
Your balance sheet also provides some of the data you will need to calculate the basic financial ratios that can help you track the performance of your practice, identify trends and implement strategies to shore up your finances. With balance sheet data, you can evaluate factors such as your ability to meet financial obligations (current ratio, days cash on hand) and how effectively you use credit to finance your operations (debt ratio, debt to equity ratio).
Although the balance sheet represents a moment frozen in time, most balance sheets will also include data from the previous year (or even multiple years) to facilitate comparison and see how your practice is doing over time.
Compare the current reporting period with previous ones using a percent change analysis. Do you have more assets? Have you accrued more debt? Invested in equipment and facilities? Are your pressing financial obligations (current liabilities) under control? Is the amount that payers owe you growing? Calculating financial ratios and trends can help you identify potential financial problems that may not be obvious.
Data from your balance sheet can also be combined with data from other financial statements for an even more in-depth understanding of your practice finances. Additional resources for managing your practice finances will appear in future issues of the PracticeUpdate E-Newsletter and on APApractice.org.
By Corporate Relations and Business Strategy Staff
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This article is the second in a series designed to help you make sense of your practice's financial statements. In the first article, we examined the balance sheet as a snapshot of your assets, liabilities and equity at a particular point in time. This article takes a look at the income statement, a financial report that details the money your practice earns, the expenses it incurs and the resulting profit or loss over a period of time.
Introduction to Income Statements
Your income statement (sometimes called a statement of revenue and expense) shows the revenue your practice earned and the costs associated with running your business. Although an income statement can be prepared for any interval, it is usually prepared annually. For example, an income statement that includes financial data for 2003 and 2004 would be titled, "Income Statement, Years Ended December 31, 2003 and 2004."
If an income statement reports data for shorter intervals, for example monthly or quarterly, it may include the total anticipated amounts for the year in one column, followed by revenue and expenses for the current period, year-to-date amounts, and current period and year-to-date amounts as a percentage of the projected annual total.
A sample income statement for the fictitious Springfield Psychological Services is presented below.
The layout of an income statement is simple to follow. Sales start at the top, expenses and other costs are subtracted as you go down the column and "the bottom line" tells you how much money your practice earned or lost at the end of the reporting period.
Sales (sometimes called client service revenue) reflects revenue from the provision of services or sale of products. Sales may be combined and simply listed on one line, or separated into subcategories to provide additional detail about revenue-generating products or services.
Sales are totaled and listed as "total sales" or "total revenue."
The next section lists expenses related to running your practice. These may include fees for consultants (secure document, requires login) such as accountants and attorneys, wages for administrative staff (secure document, requires login), costs associated with advertising (secure document, requires login) and marketing activities, (secure document, requires login) depreciation of office equipment and furniture, rent, (secure document, requires login) utilities, professional memberships, liability insurance, provisions for bad debt and other costs of doing business.
Expenses are totaled and listed as "total expenses."
Following the expense section of the income statement, total expenses are subtracted from total sales to calculate "operating income," your profit from operations before interest and taxes.
Nonoperating Gains and Losses
Revenue that is not related to the core operations of your practice is accounted for in this section. This may include interest and other earning from investments, donations and gains or losses from the sale of assets.
Interest paid on outstanding loans is also listed in this section. Some income statements detail both interest earned and interest paid, while others show only the total.
The amount of income tax you have paid, or expect to pay, for you practice is listed for the reporting period covered by the income statement.
Finally, at the bottom of the page, appears the number everyone is interested in: net income. Also called net profit or net earnings, net income reflects how much your practice actually earned or lost during the reporting period. This is essentially amount of money remaining after all expenses are subtracted from total revenue.
Like the balance sheet, your income statement provides some of the data you will need to calculate the basic financial ratios that can help you track the performance of your practice, identify trends, and implement strategies to shore up your finances. With income statement data, you can evaluate factors such as your profitability and ability to manage your expenses.
Combined with data from your practice operations and other financial statements, your income statement allows for an even more in-depth understanding of your practice finances:
- How well are you using your assets to generate revenue?
- How effective are you at collecting payments owed to you by third-party payers?
- Which of the services you provide are making or losing money?
- What referral sources and payers account for the biggest sources of your revenue?
Although the income statement represents a particular period of time, most income statements will also include data from the previous year (or even multiple years) to facilitate comparison and see how your practice is doing over time.
Compare the current reporting period with previous ones using a percent change analysis. Are your revenues growing? Have your expenses increased exponentially and, if so, which expenses are out of control? Is your practice becoming more or less profitable? Are your biggest revenue sources changing? Does a pattern of tax increases warrant seeking consultation with a tax advisor? Are you spending more time on less profitable activities? Calculating financial ratios and trends can help you identify potential financial problems that may not be obvious to the naked eye.
Developing a better understanding of your practice finances can give you the tools to set your own course to success and make well-informed decisions that benefit both you and the clients you serve. Additional resources for managing your practice finances will appear in future issues of the PracticeUpdate E-Newsletter.
By Corporate Relations and Business Strategy Staff
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A basic analysis of financial data helps you track the performance of your practice and implement strategies for a sound financial future. This article describes key ratios and indicators to help you begin the process.
Some practitioners are more familiar with financial terminology than others. You may find it helpful to consult a glossary of relevant terms as you read this article. And though the subject of finances is tedious for many health professionals, it's crucial be informed and to monitor the financial pulse of your practice.
Begin by gathering your financial statements including balance sheets and income statements for the past three years. Once you have compiled this information:
- Calculate the financial ratios listed below for each year. (You may want to use a different time interval, such as monthly or quarterly, if that works better for you based on your bookkeeping system and available financial statements.)
- Look for changes and trends, both positive and negative. Have the values gotten better or worse? Sometimes trends are easier to identify visually, so it may be helpful to plot these data points on a graph.
- Try to determine the cause of each change. Were the changes planned or expected, or do they come as a surprise?
- Pinpoint indicators that look problematic and think about how can you address these problem areas and make improvements. You may wish to consult with your financial advisors(s) in this regard.
Key Financial Ratios
Financial ratio analysis uses data from financial statements to help you measure your practice's financial performance. There are many different ratios you can calculate, depending upon your need and the nature of your practice. The main categories and a few examples of each are listed below.
You may generate the following ratios on your own, or ask your accountant to calculate them for you. For those who use financial software such as Quicken or Microsoft Money to help manage their bookkeeping, such software can easily calculate some or all of the following indicators.
Total margin (also known as profit margin): Measures your ability to control expenses and tells you how much money you actually keep for each dollar that comes in. For example, a Total Margin of 0.17 indicates that for every dollar of revenue earned, you kept 17 cents. You can improve your Total Margin by increasing rates, reducing costs, or increasing your non-operating revenue. The higher your Total Margin, the better.
Total Margin = Net Income / Total Revenue
Return on total assets (ROA; also known as return on assets): Measures how productively you are using your assets to generate revenue by telling you how many cents of profit you generate with each dollar of your assets. A higher ROA means your practice is more productive.
ROA = Net Income / Total Assets
Current ratio. Measures your ability to pay back your short-term debts by telling you how many dollars you have in current assets for each dollar of current liabilities. A higher current ratio is better (i.e., 2.0 or higher).
Current Ratio = Current Assets / Current Liabilities
Days cash on hand. Measures your ability to make your payments when they are due by telling you the average number of days worth of expenses can you cover at any given point in time. You want to strike a balance by having enough cash to pay your bills each month and meet any unexpected expenses, but not having so much that you are not utilizing your assets effectively. For example, your may want to invest extra cash in a vehicle that will generate additional income rather than just sitting in your checking account.
Days Cash on Hand = (Cash + Marketable Securities) / [(Expenses - Depreciation - Provision for Uncollectables) / 365]
Debt Management Ratios
Debt ratio. Measures the percentage of your practice's total financing that comes from debt. Creditors prefer a lower debt ratio and will be more likely to give you a loan or a better rate, since it means less risk for them.
Debt Ratio = Total Liabilities / Total Assets
Debt to equity ratio. Measures how much you have on credit for each dollar of equity you have. Creditors also look for a lower debt to equity ratio, since lending you money is less of a financial risk for them if you have more of your own money invested in your practice.
Debt to Equity Ratio = Total Debt / Total Equity
Asset Management Ratios
Total asset turnover. Measures how efficiently you are using your assets by telling you the amount of revenue you generate for every dollar of assets. A higher total asset turnover ratio is generally better, although it is important to strike a balance. Having too many assets reduces your profits, but too few may result in not having enough resources to offer needed services or pursue new sources of revenue.
Total Asset Turnover = Operating Revenue / Total Assets
Days in accounts receivable (also known as average collection period): Measures how effective you are in managing your receivables by telling you the average number of days it takes you to collect a payment. Since you want to collect receivables as quickly as possible a smaller value is better.
Days in Accounts Receivable = Net Accounts Receivable / (Net Client Service Revenue / 365)
Common Size and Percent Change Analyses
Common size analysis: Shows you each item on your income statement as a percentage of your total revenues and each item on your balance sheet as a percentage of your total assets. To calculate, divide each income statement item by total revenues and each balance sheet item by total assets.
Percent change analysis: Helps you see what items on your balance sheet and income statement are growing or shrinking and identify potential financial problems that may not be obvious to the naked eye. Calculate percent change year to year for each balance sheet and income statement item.
Percent Change = (Year 2 Value - Year 1 Value) / Year 1 Value
As mentioned above, begin your analysis by reviewing three years worth of historical data. Once you've taken this look back, start tracking these indicators on an ongoing basis and continue to monitor the financial health of your practice.
By Corporate Relations and Business Strategy Staff
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Become your own money manager and make every cent count as you start your career.
By Melissa Dittmann
You just graduated, you owe thousands of dollars in student loans, and you may pull in only $40,000 to $50,000 a year in your first job as a psychologist. Are you doomed for bankruptcy?
Not if you manage your money-even the little you do have-wisely, says financial adviser Flora L. Williams, PhD, professor emerita of consumer sciences and retailing at Purdue University. When first starting out, you might not be earning the big bucks quite yet (see Starting salaries for psychologists), but as you gain work experience, the investment you made in your education will pay off, Williams says.
But in the meantime, make every penny count, say financial advisers. They recommend students and new professionals make lifestyle sacrifices, seek additional income—such as with part-time jobs or graduate assistantships—create a budget and hatch a savings and investment plan early on.
Taking such action now is key because delaying may wind up costing you more later, says Williams, author of "Financial Success for College Students: Climbing the Steps from Financial Dependence to Independence," available for free at www.colfinancialsuccess.com.
"There is hope," Williams assures in-debt graduates. "But you can't have it all when you graduate, and what is ideal—such as a nice new car and apartment—is not usually what is adequate."
Here are steps you can take to better control your finances.
First off, beware of a common financial mistake: underestimating your expenses and overestimating your future income.
To avoid that, Joshua Hrabosky, a clinical psychology doctoral student in the Virginia Consortium Program, uses a computer spreadsheet to keep track of his finances. He records the amounts he pays for essential items—like rent, tuition and groceries—and other expenses, like entertainment and miscellaneous costs. At the end of each month, he calculates his expenses and budgets for the next month.
"By keeping this budget, I have been continuously aware of my limits within each month and have been able to keep my expenses at an acceptable level that prevent me from going too much further into debt than I already am," Hrabosky says.
Pay off debts
Minimize the credit card debt you accumulate while in school and pay it off as soon as possible, Williams advises. Credit cards' high interest rates—sometimes up to 20%—can make small purchases snowball into unmanageable debt. However, student loans offer more repayment options and lower interest rates.
Moreover, the more debt you accumulate, the bigger impact it can have on your transition from student to professional. Landlords, employers and insurance and mortgage companies can view your credit record and become alarmed if your finances are a mess, Williams says.
Rakefet Richmond, PsyD, a 2003 graduate from Indiana State University, monitors her credit card charges to avoid paying back debt at high interest rates. "If I cannot pay the full amount on my credit card one month, I will cut it up," Richmond says.
To help pay off his debts, Luis Felipe Morales, a graduate student at Pepperdine University, pays about $115 per month to fend off accruing interest and chip away at the principal of his $18,000 student loan debt from his undergraduate program, even though his loans are deferred while he is in school. He also carries $12,000, so far, for his first two semesters in graduate school and pays the interest on his graduate loans.
As soon as you start working, put 5–10% of your salary in a savings account or credit union, financial advisers suggest. Have it automatically deducted from your paycheck, adds Williams, so that instead of looking for leftover money from your paycheck each month you have a set amount devoted to savings.
"At first, you might be putting it in and then taking it out, but it still helps start a discipline to save," Williams notes. Having a spare jar to throw extra coins in is another simple way to start saving, she suggests.
Financial advisers recommend putting away the equivalent of three to six months of your average monthly expenses to be prepared for any unexpected expenses—like pricey car repairs or a health emergency.
Once new professionals have created an emergency fund, Williams then advises them to invest. Such investments as real estate, retirement plans and stocks can offer big returns in the long term, but starting early with investments is key to getting higher returns, she adds.
Also, by laying a stable financial footing now, you can set a path to retire early. For instance, a new professional who saves $2,000 per year for just six years in an Individual Retirement Account (IRA) can earn up to $1.2 million in their IRA by age 65, she says.
Williams also recommends taking advantage of employers' tax-deferred money investment options—such as bonds or retirement investment plans, like a 401K.
However, investments can carry risk: There is a chance of losing money, such as if stock prices fall. To counter some of that risk, Williams recommends diversity in investments, such as by holding:
- Liquid assets, like checking or savings accounts
- Nonliquid assets, such as real estate, that appreciate over time
- Assets with marketability—such as stocks and bonds—that can earn high returns but can carry more risk than other investments
Buy smart and sacrifice
Financial advisers say new professionals who carry heavy debts should be prepared to make some lifestyle sacrifices at the beginning—such as by opting for affordable housing and skimping on some luxuries—so they live within their means and gain control over their finances.
Sean Casey, PhD, a 2002 graduate of the University of Utah, says he has learned to watch his expenses. He recommends cutting costs by buying basic living items, like dishes and cookware, at local thrift stores and learning basic maintenance and repair skills, such as changing the oil in your car.
"It might not seem like a lot, but it adds up," he says.
To buy smart with larger purchases, such as a car or computer, Williams suggests using the "rule of three"—compare three products at three different places with three types of financing.
Some sacrifices that can also save money:
- Share an apartment to reduce rent costs
- Live close to work and take public transportation to forgo a car payment
- Monitor your food expenses. Eating out and buying groceries are one of the largest expenses for new professionals—averaging about $400 to $500 a month, Williams notes. That makes unnecessary food expenses a prime area in which to cut costs.
If you still feel as though your current income isn't enough to cover your expenses, consider a temporary second job to pay off student loans and then use your main job to pay for living expenses. A job as a waiter, store clerk or consultant may be worth the extra work and extra time to help gain greater control over your finances, Williams says.
While debts and limited finances may seem discouraging now, Williams says students should take comfort from the graduate degree they earned.
"You have a degree, and that is wealth; it is human capital," she says. "It may not feel like financial wealth now as you are paying back the debts, but once you do [pay back the debts], you will have a new financial freedom."
- This article was originally published in the April 2004 issue of gradPSYCH.