Summary of presentation from Alex Meyer with PCC for PMI's Certified Pediatric Office Executive (CPOE) program
Running a successful pediatric practice involves more than just excellent patient care—sustaining your business requires a clear understanding of your finances. From interpreting profit and loss reports to analyzing balance sheets, financial statements are essential tools that give physicians and managers the clarity they need to make sound decisions. In this resource, pediatric practice consultant Alex Meyer guides us through the essentials of reading these statements, so your practice can continue to thrive.
Financial statements are the backbone of a practice’s financial knowledge. At the heart of this is the fundamental accounting equation: **Assets = Liabilities + Owner’s Equity**. Assets include everything your practice owns or is owed (from vaccine inventory to accounts receivable). Liabilities, by contrast, are what your practice owes—such as loans, rent, or unpaid invoices. Owner’s equity represents each partner’s net interest in the practice, calculating the value remaining after liabilities are subtracted from assets. Together, these concepts lay the foundation for the primary financial statements that every pediatric practice should know.
The **balance sheet** is a snapshot of the practice’s financial position at a specific moment in time. It details all the assets, liabilities, and equity, helping measure long-term stability and solvency. For example, a fictional practice, Little Sprouts Pediatrics, had assets of $1,455,000 at year-end, offset by liabilities of $570,000 and equity of $885,000. This statement confirms that every dollar of assets is funded by liabilities or owner investment—a crucial reality check for decision-makers. It’s also where you’ll see retained earnings accumulate—profits that have not yet been distributed to owners.
While the balance sheet shows a moment in time, the **income statement** (or profit and loss statement) summarizes revenue and expenses over a period, usually a fiscal year. This statement reveals whether the practice was profitable, breaking down income streams (medical services, bonuses, interest) and major expenses (payroll, supplies, vaccines, and overhead). For Little Sprouts, a net income of $6,000 in one year demonstrates a modest profit, flagging opportunities for growth or cost optimization.
Beyond profits, cash flow is king. The **statement of cash flows** tracks how cash enters and leaves your practice across operational, investing, and financing activities. This helps you avoid surprises when funds are needed—even if you appear profitable on paper. For instance, a large equipment purchase might be depreciated on your income statement, but its full cash impact hits immediately. Likewise, distributions to partners don’t appear as practice expenses, but drain actual cash, making this statement especially critical for cash management.
A fourth important report is the **statement of retained earnings**, which acts as a bridge tying profits, distributions, and accumulated value together. It shows how much profit is kept in the business for reinvestment versus how much is distributed to the partners. Monitoring this helps practices strike the right balance between rewarding partners and fueling future growth.
Accounting comes in two main flavors: **cash basis** and **accrual basis**. Most small practices favor cash basis accounting for its simplicity—it records income and expenses as money changes hands. Accrual accounting, however, better matches revenue and related expenses to the period in which services were rendered. Understanding which you use affects how you interpret the timing of profits, expenses, and available cash.
Taken together, these statements provide a 360-degree view of your practice's health. The income statement diagnoses earning power, the statement of cash flow ensures liquidity, the statement of retained earnings tracks value distribution, and the balance sheet offers a complete financial snapshot. Regularly reviewing these empowers you to find improvement areas, weather financial storms, and support responsible growth.
Reliable, expert advice is indispensable. Every practice should rely on a trustworthy CPA to ensure compliance, help interpret these statements, and advise on tax planning. Partners should also retain individual advisors for personal tax implications of business decisions. Never make large decisions without this professional input.
A solid foundation in reading financial statements arms pediatric leaders with the information they need to optimize revenue, control expenses, and safeguard the ongoing viability of the practice. Even if you’re not an accountant, time invested in understanding these basics will pay dividends in business stability and peace of mind.
**5 Practical Takeaways for Pediatric Practice Leaders:**
1. **Learn the Four Key Financial Statements:** Understand how to read your balance sheet, income statement, cash flow statement, and statement of retained earnings. Each provides unique insights into your practice’s health.
2. **Track Cash Flow Closely:** Profitability doesn’t guarantee solvency. Regularly monitor your statement of cash flows, especially after making large purchases or partner distributions to avoid cash shortages.
3. **Distinguish Between Cash and Accrual Accounting:** Know which accounting method your practice uses—this impacts how you interpret financial results and make decisions about timing and cash management.
4. **Engage Qualified Accountants:** Always use a CPA for your business’s financial and tax advice, and encourage partners to have independent advisors for personal implications. Their expertise is crucial for compliance and strategic planning.
5. **Review and Act on Trends:** Use your financial statements not just as historical records but as decision-making tools. Track trends, identify areas for improvement, and adjust your business strategy proactively.
Understanding and using financial statements is not optional for independent pediatric practices—it’s vital for ensuring your doors stay open and your business can care for generations of patients to come.