Magazine article Clinical Psychiatry News

How to Read a Balance Sheet

Magazine article Clinical Psychiatry News

How to Read a Balance Sheet

Article excerpt

A balance sheet provides an essential picture of your practice's financial health, yet, amazingly, few physicians can make heads or tails of one. Medical schools don't teach that stuff, of course, but most doctors don't see a reason to learn about it, anyway. After all, that's why you pay an accountant, right?

But it's your practice. You can't really get a handle on its finances and how they are trending unless you can interpret financial statements. With a basic understanding of what's going on, you won't need to rely on them to make all the crucial decisions about your practice's future.

A balance sheet is a snapshot of a measure of a practice's financial situation at a given point in time. And its main usefulness lies in how it compares with other snapshots at other times.

Essential components of a balance sheet include assets (what your practice owns outright), liabilities (what it owes others), and equity (value added to the practice, such as financed equipment and profits retained within the business).

As the name implies, a balance sheet must balance. The fundamental equation is assets equal liabilities plus equity.

In other words, which I find easier to grasp: Equity equals assets minus liabilities.

Assets are typically divided into current and long term. Current assets are those that could be liquidated within 1 year, such as cash, accounts receivable, and inventory if you stock products for resale. Long-term assets include buildings, furniture, equipment, and other durable goods, less depreciation (the taxable value they have lost since they were purchased).

Liabilities are similarly classified as current and long term. Current liabilities must be paid within the next year and include accounts payable, wages, and payroll taxes. Long-term liabilities, such as mortgages, loans, and equipment leases, are due over a period of years.

Equity is basically the owner's money--theoretically what would be left if you liquidated all the practice's assets and paid all its liabilities. It is not a realistic measure of a practice's net value since it doesn't reflect the current, open-market value of assets and doesn't consider intangibles such as good will. That's not what a balance sheet is designed to measure.

What, then, is a balance sheet designed to measure? Two of the three key elements of financial strength: liquidity and solvency. The third element, profitability, is measured with a separate tool, the income statement.

Liquidity, as calculated by current ratio (current assets divided by current liabilities), is a measure of the practice's ability to pay its bills over the next year. …

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