Financial intelligence: The missing part of a medical education

I remember the first time I was handed the financial reports of my group practice. I asked myself, “What am I looking at?” I felt confused. I didn't know what all the line items were. I didn’t know what the numbers really meant. Letting my pride get in the way, I acted like I knew what I was reading.
 
Then, a little voice inside my head said, I needed to learn and master this information. I wanted to be able to contribute and not only understand but affect the numbers on the page. After making a commitment to work with the reports, I discovered something that surprised me--understanding financial statements isn’t difficult or complicated; it’s merely a different set of rules, concepts and words to be learned.
 
I'm not alone, and neither are you
Since that discovery, I’ve spoken with many groups and physicians across this country. The most common thread I’ve seen in our conversations is a deficit in financial intelligence. Many physicians are in the same boat I was. It's funny; they'll admit it to me in confidence, but not in front of others. I'm just happy they admit it to themselves.
 
If you want, you, too, can easily master the understanding of financial reports. An integral part of improving your financial intelligence is knowing how to use the data in these reports. You’ll want to begin your education by becoming familiar with the three basic financial reports you will examine on a regular basis.
 
The income statement
The income statement, also known as the profit and loss statement, is a critical report and the one most people look to first. Here you find how much money came into your business and how it arrived. You also see where your money went. At the bottom, you’ll see how much money is left. Always look at the income section to see where the money is coming from and how much is coming in. This can provide clues as to where you can grow.
 
The expense section shows where the money is going, where you might be able to save and will let you know if you are being efficient with your money. The critical thing to keep in mind is that income and expenses are what make the bottom line—the net income. But don’t just look at the bottom line. Instead, be diligent and focus your attention on the revenue and expense sections. Look for trends and ask questions when you don’t understand something or discover items that don’t make sense.
 
The balance sheet
The balance sheet is something that you will want to watch carefully. Bankers always ask for this report. It shows how well you’ve managed your cash, assets and debt. The report is based on the accounting equation: assets = liabilities + equity. You might see this in your personal finances as equity = assets - liabilities where your equity is your net worth.
 
On the balance sheet, you will want to watch what your cash is doing. How much cash do you have in reserve? Is it enough? Do you have cash on hand to meet your expenses, or will you need to borrow? What are your liabilities doing? Are they growing or shrinking? What are your assets doing? Have you invested correctly? If you borrowed money, why? Are you investing in assets that produce revenue? Or, is the borrowed cash going to meet your day-to-day operational costs?
 
One is a sign of strength and positive outlook; the other is disconcerting and a sign of weakness.
 
The cash flow statement
This report is critical and reveals exactly where your cash is coming from. It can show you how much cash your day-to-day operations and investments are generating. It will show you where and how much cash is leaving your company. Cash is the lifeblood of any business, and it's important to see how the cash is flowing through your business. If you aren’t getting this report from your accountant or management company, ask for it.
 
Always ask why
Don’t let pride get in the way of your success. As you read these reports, always ask yourself, "What does this number represent? Why is it there?" Look for the trends and ask "Why is this trend occurring? What decision led to this change?" If you cannot find the answer, then you know you have some investigating to do.