A proactive approach eliminates the risk of making decisions under pressure in mid-to-late December, with few options available and too late to take remedial steps.
Nine months of actual year-to-date data provides a solid foundation to confidently project your financial condition through December 31. Once 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 2014? If not, why not?
• 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 31st?
• How much income do we retain in the practice for practice valuation and future investment purposes?
• Will we have the cash and what options are available for year-end shareholder distributions?
There are four key projection components:
1. Financial statements and ratios.
2. Practice valuation at 12-31-14.
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.
• Projected financial statements and ratios through December 31, 2014. January through September actual year-to-date financial statements, married to your October through December budget—modified as necessary for year-to-date line-item “bleeders”—is the formula to project out your practice’s financial statements through December 31st.
Trust your accounting team to sweat the details; there are only a handful of vital signs that should be on shareholders’ radar screen, with related questions, as illustrated in the tables above.
You also have the ability to calculate estimated financial statement ratios to determining compliance with bank line of credit and loan covenants, as well as setting the table for negotiating any 2015 financing requirements with your banker.
• Projected Practice Valuation as of December 31, 2014. 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 months. There’s no need to wait on final 2014 valuation numbers with the issuance of your accountants’ report in 2015 to start the planning process now.
• Projected 2014 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 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 15th surprises.
• Targeted 2014 shareholder compensation pool and cash available for year-end distribution. As questioned above, is your projected Income from Operations sufficient to cover your targeted 2014 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 year-end distributions sabotages the financial integrity of your practice and places pressure on cash flow in 2015. Does projected cash flow support scheduled distributions without the need to tap into your line of credit?
There are only 20 business days between Thanksgiving and New Year’s, with frenetic clinic schedules and heavy surgical case loads. Eleventh-hour reductions in shareholder compensation, or 2015 announcements of missed 2014 financial goals, seriously undermine the credibility of 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 31st. REVIEW
Mr. Kroll has more than 20 years of health-care experience, including 11 years with Minnesota Eye Consultants, P.A., providing financial management and consulting CFO services to independent and hospital-affiliated specialty and primary-care medical clinics. Contact him at firstname.lastname@example.org or on Twitter at https://twitter.com/CharlesPKroll.