We spend considerable time talking to practice owners about the importance of financial analysis in their practices, but what does this mean and how do you get there? The first step involves developing a process for producing useful financial statements on a regular basis. By “useful”, we are referring to three basic elements – timeliness, accuracy, and context. Without these elements, effective financial analysis is not possible.

• Timeliness
  Financial statements are of their greatest use to the owner when they are available shortly after the close of the month, quarter or year to which they apply. When using financial data to determine the performance of the practice, the owner needs to determine why the results are what they are. With the passage of time, the answers to the “why” questions fade, and those answers become guesses. Furthermore, financial statements are only useful if they provide clues to where improvements in performance exist. If several weeks or months pass before an owner is able to review the financials, the opportunity to capture the benefits of improved practice performance in the intervening period has passed and dollars are lost.

• Accuracy
  Even when financial statements are available within a day or two, the statements are not particularly helpful if the owner cannot rely on the numbers. The monthly, quarterly, and annual closing process should include consistent procedures that ensure that the financials are largely error-free. Otherwise, the practice owner will be making financial decisions based on faulty data.

• Context
  Even when a practice is able to generate timely and accurate financials, those statements are still limited in their usefulness if there is no context for judging performance. If the statements say practice overhead is 62%, is that good or bad? Practice revenues grew by 8% last year, but how does that compare to similar practices in our market? Goal-setting and industry benchmarking are effective tools for transforming your financial statements from a historical document into a forward-looking document that fuels financial and operational performance.