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.