By: Tyler Judkins, Member Business Advisor
Your 9-year-old son has never been on a plane before. In anticipation of calming his nerves, you tell him that maybe he can talk to the pilot and sit in the cockpit. When the opportunity presents itself, you explain the situation to the pilot and he agrees with your request.
The pilot invites your son into the cockpit and points to the fuel gauge; “Ya see this? This tells me how much gas is in the plane. I look at it every so often. Right now, you can see that it is about ½ full, so I’m thinking we’ll have enough to get to our destination.” Your son replies; “How do you know that is enough? How far are we going? What if we run out? What about all these other gauges, what are they for?” The pilot responds “Well, ½ of a tank is pretty full. There have been some occasions when I’ve had to take fuel out of the plane because my car was low on gas. Other than that, I’ve never ran out before so I’m thinking we’ll be just fine. As far as the other gauges go, I know that I should probably be paying more attention to those but I’m just too busy flying the plane and taking care of my passengers to pay attention to those.”
Needless to say, you and your son get out of there like it’s the Friday before a long weekend. Compare this to the pilot that knows all the gauges, what they are telling him, why they are important, and knows what to do in the event something isn’t right.
This is analogous to the small business owner that runs his business based on the balance in his checking account (the fuel in the tank) vs the small business owner that looks not only at his cash, but income, expenses, margins, ratios, liquidity, leverage, cash flow, debt service, the list goes on. It goes without saying which business is more successful.
Financial Statements 101
Typically, the term ‘financial statements’ consists of a Balance Sheet and a Profit and Loss (aka Income Statement).
What is a balance sheet?
A balance sheet is a document that summarizes a company’s assets (what is owned) and liabilities (what is owed). By default, it also tells the difference between the two, which is referred to as equity.
Let’s say you have saved $10,000 to buy a home. The seller will sell you the home for $105,000, they don’t care where the money comes from as long as they get it. So, being the savvy PECAA Member that you are, you go to the bank and ask for a $95,000 loan. They see your good looks and agree to lend you the money. You give the $105,000 to the seller and you are the proud owner of the home, right? Well, sort of. If you were to illustrate this on a balance sheet, here is how it would look:
The magic equation in account is…Assets = Liabilities + Equity. This will ALWAYS hold true. This balance sheet could change the next day. What if you decide to buy a car, borrow more money, or maybe you decide to lend money out (aka an account receivable). A balance sheet reflects a single moment in time.
What is an Income Statement?
Let’s talk about the $10,000 that you used for the down payment on the house. Where did that come from? Well, over a period of time, that money was earned and collected in the form of cash. During a defined period of time, an income statement will show the user where the money came from (revenue or sales), what expenses there were (expenses), and what was left over at the end of that period (net income).
An simple example of an income statement might look like the following:
Obviously the above examples are for the layman. Nonetheless, it outlines the basic purpose and structure of the financial statements.
If you are running your business based on one single gauge – how much cash is in the bank, you are leaving a lot of information on the table that can be used to help you get from point A to point B. Why not use all the gauges available to you?
PECAA’s Member Business Advisors are here to help guide your practice by using the gauges that have been proven necessary to take any business to the next level.
What PECAA Members are saying about the MBA Program…
PECAA’s Member Business Analyst (MBA) program centers around PECAA’s finance professionals giving their opinion as to the financial health of your practice. Seeing these figures from a financial perspective allows me as an optometrist business-owner to fine tune our practice to best meet our goals. –Dr. Brian Abert
Words cannot express how pleased we are with the PECAA MBA Program. Stephanie actively listens to any questions we have and directs us to the appropriate person for counsel and/or resolution. On-site education assures that all staff will be up to date with new ideas for our practice and improvement objectives. Her financial reviews provide our Doctor and Practice Manager with operational insight and areas for improved profitability and patient satisfaction. We could not be happier with the MBA Program. – Ms. Patti Bushnell
The MBA program at PECAA has been extremely helpful for our practice in analyzing and understanding our numbers, as well as setting benchmarks and goals. We look forward to our quarterly meetings with Bryan and James, where we evaluate our performance on Glimpse and compare it to the national averages. This has really helped us identify the areas we needed to improve, and we have been able to focus and make appropriate changes in our practice. I really appreciate the individualized attention they have given us. Both Bryan and James are extremely knowledgeable in what they do and their advice has been an invaluable asset to our practice! – Dr. Mila Ioussifova
As a new practice owner, I found the PECAA MBA program to be particularly helpful. It was so valuable to have someone outside of my practice to look at my metrics, give advice and help me set goals for the future of my practice. Every doctor who is a PECAA member should take advantage of this service. It is such a fantastic program to have included in our dues. – Dr. Jen Burke