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Basic Principles in Medical Office Accounting Lucy Carter, CPA May 8, 2018. Objectives. Introduction to Accounting Understanding the Balance Sheet Understanding the Income Statement Understanding the Budget Process Controlling Overhead Expenses Establishing a system of Internal Control.
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Basic Principles in Medical Office AccountingLucy Carter, CPAMay 8, 2018
Objectives • Introduction to Accounting • Understanding the Balance Sheet • Understanding the Income Statement • Understanding the Budget Process • Controlling Overhead Expenses • Establishing a system of Internal Control
Chart of Accounts • Heart of any financial program or reporting • Lists of all potential accounts for which information will be gathered (eg revenue, payer reimbursements, supply expenses, staff payroll expenses, rent, utilities, supplies, etc.) • Categories include: • Income • Expenses • Assets • Liabilities • Equity
Accounting Methods • Cash Based Accounting • Recognizes revenue only when cash is collected and recognizes expenses only when cash is paid • Widely used by smaller practices and by all size practices for income tax reporting • Simple and straight forward
Accounting Methods • Accrual Method Accounting • Recognizes revenue when earned and expenses when incurred • May accurately reflect your financial position • Provides a more accurate matching of revenue and expenses
Accounting Terms • Fixed Expense • Variable Expense • Gross Revenue • Net Revenue/Collections
The Balance Sheet • Understanding the Balance Sheet • Snapshot of a business’ financial condition at a specific point in time • Report compares assets to liabilities • Assets = Liabilities + equity • Valuable information on a business’ financial strength • Banks and other lenders use this report • Usually prepared at the end of an accounting cycle (monthly, quarterly, annually) • Includes total assets, liabilities and equity • At any given time, the total assets must equal the sum of liabilities and equity
The Income Statement • The Income Statement • Is a report of the revenues, expenses and net income for a specified period of time. • Valuable document in assessing financial condition of the practice • Valuable for creating a budget or financial goals
The Income Statement • Effective Financial Management • Expense Tracking • Comparisons of expenses to revenue can be monitored for efficient use of staff and supplies in comparison to work being performed • Breakeven Point • Point where revenue for services minus all variable expenses equals the fixed expenses • Seasonal Projections • Monitor trends to project the financial well being during certain seasons • Tax Planning
Budgeting Process • What is a budget? • Tool to translate the practice’s goals and objectives into dollars • Useful budget format is often based on the clinic’s income statement which reports all income and expenses of the practice • Actual results are adjusted for projected changes • A good budget will include a fair amount of detail without becoming overwhelmed or unmanageable • Should be reviewed monthly and compared to actual results to verify compliance and make any necessary adjustments
Budgeting Process • Different Methods for Creating a Monthly Budget • Build the budget based on the prior year’s revenue and expenses • Identify variable expenses and apply the respective expense percentage to the revenue budget each month • Fixed expenses should be entered, since they occur each month
Budgeting Process • Effective Use of a Budget Enables a Manager to: • Maintain focus on what the goals for the clinic are and what it will take to achieve them • Assess the productivity of the practice by comparing budgeted goals to actual results • Foster accountability in department managers • Analyze variances in production or costs of running the practice • Make timely changes to operations to keep on track for yearly goals • Manage growth opportunities while sustaining the current business
Overhead Expenses • Controlling Overhead Expenses: • A business can increase net income by increasing revenue or decreasing costs • Involve the staff? • Simply decreasing expenses is not always the best option • Example of cutting a medical assistant • Compare your current cost structures against national benchmarks for the same specialty and size
Overhead Expenses • Common Areas to Evaluate for Effectively Reducing Practice Costs: • Malpractice Insurance Discounts • Physicians participate in Risk Management Training • Salaries and benefits • Review annually to market benchmarks • Supplies • Creating a list of all purchased supplies • Provide to other supply vendors for a bid on your business • Look for opportunities to participate in GPO’s • Review Current Phone and Data Plans • Negotiate a better price for these services • Evaluate Purchased Services • Costs of services such as janitorial, equipment maintenance & payroll services • Building/Office Space • Negotiate lease terms, if possible
Statement of Cash Flow • It is important to maintain awareness of your practice’s cash flow, as it reflects the funds available to maintain business operations • Shows how much cash your practice is generating from one period to the next • Operations • Investing • Financing
Cash Management • An effective cash management process is essential to ensure money paid to the office is: • Accounted for properly and deposited in the bank • Allocated to the correct accounts • Credited to the correct physician or department (charts of accounts)
Cash Management • Effective Cash Management Processes • Bank Deposits and Accounting Entries • Daily Receipts and Adjustments Posted • Gross Receipts Report
Cash Management • Effective Cash Management Processes • Internal Controls • Implement a Policy for External Accounting Audits
Accounts Payable • Accounts Payable • Amount a business owes to its suppliers or customers • Accounts owed to a supplier for delivered medical supplies • Refunds requested from an insurance payer for overpayments • Refunds due to patients for overpayments on their accounts • Payment for facility maintenance, utilities, rent, equipment leases, etc.
Accounts Payable • Effective Accounts Payable Process • Who will receive mail and deliver the invoices? • Identify a process of shipping and receiving invoices • Who will verify the accuracy of insurance or patient refund requests? • Who will receive and input all “bills” into the accounting system? • Who will cut checks verifying the correct timing and payments amounts? • Who will send out all accounts payable checks? • What is the process for handling returned or cancelled checks?
Entity Structures • The Different Entity Structures • Sole Proprietorship: • Simplest and cheapest way to get started in practice • Physician/Owner and the practice are treated as a single entity for tax purposes • Provides virtually no liability protection for the physician • Professional Business Corporations (PC’s) • C Corporations: most formal business corporations, have numerous stakeholders, but the corporation will be taxed on any net income • S Corporations: beneficial, issue stock, number of shareholders is limited, profits can flow directly to the owner’s personal tax returns • Limited Liability Companies (LLC) • Offer liability protection, income flows directly to the owner’s personal tax returns • Can have unlimited number of owners
Questions? Lucy Carter, CPA Member and Practice Leader Healthcare Industry Team lcarter@kraftcpas.com 615-346-2497