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4 Tools to Project Your Practice’s End-of-Year Finances

4 Tools to Project Your Practice’s End-of-Year Finances
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Charles Kroll

Charles P. Kroll, CPA has 24 years of healthcare experience providing accounting and financial management and consulting CFO services to independent and hospital-affiliated specialty and primary care medical clinics and ambulatory surgery centers. Contact him at cpkroll@outlook.com or on Twitter at https://twitter.com/CharlesPKroll

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Charles Kroll (click to view)

Charles Kroll

Charles P. Kroll, CPA has 24 years of healthcare experience providing accounting and financial management and consulting CFO services to independent and hospital-affiliated specialty and primary care medical clinics and ambulatory surgery centers. Contact him at cpkroll@outlook.com or on Twitter at https://twitter.com/CharlesPKroll

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Take steps now to avoid negative year-end shareholder compensation and tax surprises.

Although it’s tempting to hit autopilot in August, now is the time to chart your financial flight plan through the end of the year. Take time to identify planning opportunities and potential pitfalls to stay on course and meet your 2016 compensation, tax and other financial objectives. A proactive approach eliminates the risk of making decisions under pressure in December, with few options available and no time to take remedial actions.

Seven months of actual year-to-date data provides a solid foundation to confidently project your financial condition through December 31. Once the data is established, you have the tools at your fingertips to address the following questions, among others:

  • Are we on track to make our targeted shareholder compensation pool for 2016?
  • Do we need to add more doctor days between now and the end of the year to make our objectives?
  • How much cash flow can be generated by aggressively working down the accounts receivable?
  • Will we be in compliance with bank line of credit and loan covenants as of December 31?
  • How much income do we retain in the practice for practice valuation and future investment purposes?
  • What is our available cash for year-end shareholder distributions?
  • What tax planning opportunities are available at the practice and individual shareholder level?

There are four key projection components:

  1.  Financial statements and ratios
    2.  Practice valuation at December 31, 2016
    3.  Federal and state taxable income
    4.  Shareholder compensation pool

All of these features can be captured on one Excel worksheet, updated as circumstances dictate and summarized for shareholder and management decision-making through the end of the year.

 

1. Projected Financial Statements and Ratios through December 31, 2016

The formula to project your practice’s financial statements through the remainder of the year is January through July actual year-to-date financial statements married to your A through December budget—modified as necessary for year-to-date line item “bleeders.”

Trust your accounting team to sweat the details; there are only a handful of vital signs that should be on shareholders’ radar screens, with related questions, as illustrated below:

Balance Sheet as of December 31, 2016

  • Cash in Bank  –  Is this sufficient to fund year-end shareholder distributions?
  • Net Accounts Receivable  –  Can AR >90 days be reduced to under ten percent by year-end?
  • Line of Credit Outstanding  –  Are there sufficient reserves for 2017 cash flow emergencies?
  • Shareholders’ Equity  –  Will equity, or “book value,” increase or decrease in 2016?

2016 Income Statement

  • Net Revenue  –  Are net collection % by lines of business as budgeted?
  • Cost of Goods Sold  –  Are surgical supplies as a % of net revenue as anticipated?
  • Operating Expenses  –  Have steps been taken to control operating expense bleeders?
  • Income from Operations  –  Does this cover shareholder compensation and debt service?

You also have the ability to calculate estimated financial statement ratios to determine compliance with bank line of credit and loan covenants, as well as set the table for negotiating any 2017 financing requirements with your banker.

 

2. Projected Practice Valuation as of December 31, 2016

Estimate your practice valuation at year-end based on your buy-sell agreement or other valuation formula and accelerate physician recruitment, retention and retirement planning by six to nine months. There’s no need to wait on the final 2016 valuation with the issuance of your accountants’ report in 2017 to start the planning process now.

 

3. Projected 2016 Corporation and Shareholder Taxable Income or Loss

Simple modifications to your financial statements will produce preliminary numbers for calculating federal and state taxable income and associated tax liabilities. Built into your projection worksheet, these steps can be automatically updated each month through the end of the year.

Collaborating with your tax adviser, make sound tax planning decisions, effectively “target” corporation and shareholder taxable income and associated tax liabilities, and avoid April 15 surprises.

 

4. Targeted 2016 Shareholder Compensation Pool and Cash Available for Year-End Distribution

As questioned above, is your projected income from operations sufficient to cover your targeted 2016 shareholder compensation pool, taking into consideration debt service payments and out-of-pocket capital investments? If not, what steps need to be taken now?

Unless there are compelling tax or business reasons, borrowing money to fund distributions sabotages the financial integrity of your practice and places pressure on cash flow in 2015. Does projected cash flow support scheduled year-end distributions without the need to tap into your line-of-credit?

Year-end is stressful enough with the holidays, frenetic clinic schedules and heavy surgical case loads. Eleventh hour announcements of missed financial goals and reductions in shareholder compensation seriously undermine the credibility and confidence in your financial management team. Proactively manage your practice’s financial health by utilizing these predictive tools for a smooth landing on December 31.

1 Comment

  1. Thank you so much Chris for publishing this great article, I specially enjoyed reading Point 1.

    Reply

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