As a Dental Practice Owner, does the "Balance Sheet" really matter when going over my financials?
Most definitely "YES" your Balance Sheet matters.
This question is asked quite often by dentists when going over their financial statements. Isn't the P&L (also known as the Income Statement) all I need to see? If a dentist really wants to know the financial health of their dental practice, the Balance Sheet is an important part of that.
As a matter of fact, if a bank or other financial institution wants to evaluate the health of your practice, the Balance Sheet is one of the first things they request. I gained one client due to a bank looking at their Balance Sheet to evaluate their practice and telling the doctor to come back when the Balance Sheet was done correctly.
I have had other dental clients tell me that their previous bookkeeper or consultant did not feel the Balance Sheet was important. Not taking the Balance Sheet seriously is a big disservice to the dentist or any business owner!
There are at least four ways the Balance Sheet is important to your Dental practice.
Assess the financial health of your practice
Compare your practice health to your peers
Assess the practice's ability to meet financial obligations
Supports Investors review of your company's net worth
Your Income Statement (P&L) might show a great net income, but leaves you asking where the cash is. Your bank account isn't reflecting that at all! You will probably use the Statement of Cash Flows to tell you where that cash disappeared to. Did you know that much of the information on the Statement of Cash Flows comes from your Balance Sheet which records your assets, liability and equity. The Income Statement is not going to show the payments to your practice loan or any distributions you took.
The Balance Sheet can also show the relation of your assets to your liabilities. It can tell you if you are in a good position to cover any short term financial obligations?
Compare your practice to your peers
The tools used to compare is called Benchmarking. Your Income Statement will show your KPI's (key performance indicatiors) such as dental and lab supplies, advertising and rent expenses. However two main ratios that are compared to see how healthy and competitive your practice is, are the Quick ratio and Debt-to-Equity ratio. The Debt-to-Equity ratio shows the financial leverage, your practice's liability divided by the equity. The current ratio is a metric that shows the liquidity of your practice. Could liquidated assets pay off your liability?
Ability to meet financial obligtions
This too can tell you more about the health of your practice. Unlike, liquidity that shows the ability to pay off liability, comparing past balance sheets can show how well you have been paying your financial obligations. Are you paying within the 30 days, or more of a 90 day time period. You can also compare this to your peers. Comparing previous Balance Sheets can show if the practice has increased it's assets or increased it's liabilities.
Investor's review of your practice net worth
Whether you are looking to sell your practice, take out a loan or take on an investor, a Balance Sheet will be used to help determine your practice's net worth. The set up of a Balance sheet is: Assets-liabilities = equity (your net worth). Think of owning a home that is worth $500,000 and the mortage is $250,000. Your equity (net worth) would be $250,000. Investors will also use the Debt-to-equity ratio and current ratio to evaluate your practice.
There are many more subjects that can be discussed on the Balance Sheet, such as leverage, efficiency and rates of return. For our purposes, the dentist can see how the Balance Sheet is a useful tool. It should be presented along with your Income Statement and Statement of Cash Flows (another subject to read about in our blogs). Whether it's to be more profitable or to cash in on your investment, you can see how important it is to have a Balance Sheet that is done properly and accurately. Life can happen and plans change. Knowing what's in your Balance Sheet can also be peace of mind.
If you are looking to have a professionally prepared Balance Sheet to help you understand your practice better, please click the link below to schedule an appointment with Bookkeeping Aesthetics.