Unlike the income statement, which represents activity for a given period, the balance sheet shows a business’s financial condition at a particular point in time, such as at month-end or at year-end. Although not literally true, it is often said the income statement indicates how a business is being run in the short-term, and the balance sheet indicates how well a business is being run strategically or long-term.

The balance sheet has three sections:

Assets – Everything the practice owns or controls (as in a lease). Included are current assets (cash, accounts receivable, inventory – items that can reasonably be converted to cash within a year), and fixed assets (items that are not readily converted to cash, such as equipment and displays).

Liabilities – What the practice owes others, including accounts payable, lease commitments, equipment finance contracts, and other debt.

Net Worth or Owner’s Equity – Total assets minus total liabilities equals technical ownership value or book value. This is distinct, however, from the market value or sales value of the practice.

By comparing balance sheets quarter-to-quarter – or at least year-to-year – the practitioner can judge the financial progress of the practice. Here are some do-it-yourself analysis ideas:

• Divide current assets by current liabilities. This ratio, called the current ratio, is an indication of a practice’s ability to cover expected obligations. This is a test of the liquidity of the business. For most small businesses, roughly 2:1 is the norm.
• Working capital, the funds used to pay the day-to-day expenses, equals current assets minus current liabilities. Many small businesses overlook the need to maintain a reasonable amount of working capital. A general rule here is difficult, but, at a minimum, working capital needs to be greater than one month’s expenses, and several months’ coverage is better.
• Look at your receivables level, compared to last year. If receivables are an increasing percentage of revenue (from the income statement), the practitioner needs to take action.
• Inventory as a percentage of revenue or patient visits is another ratio to track. Since inventory has a significant impact on cash flow, it is important to make sure it is sufficient to fill the needs of patients, but not excessive. (Note: practitioners must take a complete physical inventory at least once each year.