When you think of your clinic, therapy office, or independent hospice practice, what comes to mind first? Likely not your financial statements. Yet these documents are the foundation of your business’s financial status, its growth potential, and its regulatory readiness. Whether preparing to secure funding, planning for expansion, or simply making smarter day-to-day decisions, mastering the preparation of financial statements is a skill no healthcare provider can afford to skip.
Realizing that financial statements are essential will aid in the understanding of important accounting principles, such as Generally Accepted Accounting Principles (GAAP). In fact, financial statements do more than just satisfy accounting requirements, they can tell your overall business “story”. And like any good story, the information needs to be accurate, timely, and well-organized to be meaningful for interpretation.
So, what exactly are financial statements, and why are they important for your practice?
Why Financial Statements Matter
Financial statements aren’t just paperwork. They are decision-making tools needed for evaluating a company’s financial health. They’re how you track profitability, monitor spending, manage debt, and evaluate the health of your operation over time. For healthcare providers, they’re also critical when dealing with insurance reimbursement, grant funding, and AHCA compliance, especially in the state of Florida.
Let’s say you’re running a group mental health practice. You’ve added new therapists, moved into a larger space, and your patient load has nearly doubled. Clearly things are going well, until you realize your expenses are outpacing revenue. Without accurate income statements and cash flow reports, identifying where the problems lie just becomes guesswork. But with well-prepared financials, the picture can become clearer. In the case of such a mental health practice, while client numbers are up, administrative costs have spiked with added staff. Compound that with a delayed insurance billing system and what you get is a disrupted cash flow. Suddenly, you have not only an explanation, but you have means towards a solution.
The Core Financial Statements
Financial reporting begins with three essential statements: the income statement, the balance sheet, and the cash flow statement. Each provides a different lens on your financial reality.
The income statement (also known as the profit and loss statement) breaks down revenue, expenses, and net income over a specific period. For example, a physical therapy office might see that while gross revenue has increased quarter over quarter, net profit is slipping due to rising equipment costs and overtime wages.
The balance sheet, on the other hand, is more of a snapshot. It outlines assets, liabilities, and shareholders’ equity at a given point in time. For healthcare providers, this often includes medical equipment, real estate leases, outstanding loans, and retained earnings. For those that are not familiar with balance sheets, the shareholders’ equity section of the statement is the remaining assets that are available to shareholders after debts and other liabilities have been paid. This helps to assess a firm’s financial health, stability, and overall profitability.
Then there’s the cash flow statement, which tracks actual cash coming in and going out. This is particularly important in healthcare, where delays in insurance payments or government reimbursements can obscure whether a practice is truly solvent, or simply waiting on receivables.
The Process Behind the Paperwork
Preparing financial statements starts with accurate data collection. This means reconciling bank statements, maintaining up-to-date ledgers, and reviewing payroll, receivables, and vendor payments. For many healthcare providers, especially smaller or growing practices, these tasks can be overwhelming. (Outside accounting support can be indispensable in such situations.)
Consider a scenario involving a home healthcare agency. The owner had been handling finances with the help of a part-time office manager. But as the business expanded, so did the complexity of their books. With multiple caregivers, varying billing rates, Medicare reimbursements, and part-time W-2 and 1099 contractors, their homemade Excel-based system was no longer cutting it. The managers realized it was time to get outside help with their accounting to clean up months of backlogged entries and establish a systematic monthly reporting process. The result? Accurate statements and better tax planning.
Of course, beyond data gathering lies the real art: ensuring the statements reflect accounting principles like revenue recognition, matching expenses to income, and properly valuing assets.
Income Statements: More Than Just Revenue
It’s tempting to look at the income statement as a tally of how much you’ve earned. But the real insight lies in the details.
First, revenue needs to be recorded when it is earned, not necessarily when it’s received. A counseling practice may bill clients or insurers in December but receive payment in January. Under the accrual method, that December service counts toward the current year’s revenue. Misapplying this principle can skew profits, create tax issues, or give a misleading sense of your performance.
Then there’s the cost of goods sold (COGS), which might not be intuitive in a service-based field like healthcare. But think about a dental office: their COGS might include dental materials, lab fees, and sterilization supplies. (We’ll discuss it in more detail a bit later.) Subtracting these from revenue provides gross profit, a key metric for evaluating operational efficiency.
A solid income statement separates operating expenses—like rent, salaries, utilities, and insurance—from non-operating expenses, such as interest payments or one-time losses. This separation gives you a clearer picture of how your core business is performing, independent of financing costs or unusual events (which happen more often than would be expected).
When you subtract operating expenses from gross profit, you get operating income—a key indicator of day-to-day business efficiency. From there, you account for non-operating items like interest and investment gains or losses to arrive at pre-tax income, which reflects the business’s overall profitability before tax obligations.
Understanding these distinctions is essential for evaluating your practice’s financial health—and for making informed decisions before taxes or outside factors come into play.
Calculating Gross Profit and Why It Matters
Gross profit is a revealing figure. It not only shows whether your pricing model is viable but also highlights inefficiencies.
Take, for example, a multi-location urgent care provider. While revenue remained steady, a deeper dive into gross profit revealed that supply costs had risen sharply in one branch compared to the others. Further digging uncovered that this location was over-ordering due to lack of inventory tracking. Simple adjustments to purchasing controls restored the gross profit margin—and added thousands to the bottom line.
To calculate gross profit, simply subtract the cost of goods sold from your total revenue. It’s a straightforward way to spot discrepancies and gauge profitability at a glance.
Indeed, gross profit margin is a widely used benchmark and comparing it to industry averages can be useful for identifying whether you’re undercharging, overspending, or operating in a high-cost environment.
Goods Sold and Cost of Goods Sold
The cost of goods sold (COGS) is a critical component of the income statement, representing the direct costs associated with producing and selling a company’s products or services. To determine COGS, businesses must calculate the total cost of goods sold during a specific period, including direct labor, materials, and overhead costs. The COGS is then subtracted from net sales to determine gross profit. Understanding the concept of goods sold and COGS is helpful for businesses to accurately prepare their financial statements and adjust pricing, manage inventory, and make better decisions moving forward.
Managing Cash Flow in Real Time
No matter how profitable you are on paper, if cash isn’t flowing, you can’t make payroll, pay rent, or invest in equipment upgrades. Cash flow statements help illuminate this.
For instance, a speech therapy practice may show strong net income, yet struggles to pay vendors. Why? Most of their income is tied up in delayed insurance reimbursements. By analyzing their cash flow statement, they realized they were waiting 45–60 days on average to get paid. Additionally, they identified significant current liabilities, such as accounts payable and short-term loans, which needed immediate attention. A strategic review paired with new billing policies and follow-up routines helped shorten that cycle and stabilized cash flow, reducing their reliance on lines of credit.
Speaking of lines of credit, these can be a vital tool in uncertain economic times (such as when a recession may be looming) and offer flexible support when cash flow is tight. We’ll likely explore this topic further but, in short, securing credit early can help businesses manage expenses, avoid costly emergency loans, and seize strategic opportunities (think discounted inventory or acquisitions) before lending conditions tighten.
Financing Activities: Long-Term Strategy, Short-Term Impact
Your financial statements should also reflect how your business funds its growth. Whether you’re applying for that line of credit to purchase new diagnostic equipment or bringing in a private investor, your financing activities—loans, repayments, distributions, or equity infusions—must be accurately recorded.
Let’s say a chiropractic clinic takes out a loan to renovate its office and add a hydrotherapy suite. That loan shows up on the balance sheet under liabilities and in the cash flow statement under financing activities. It is important to distinguish between short-term loans and long-term loans, as long-term loans are categorized under long-term liabilities. Repayments, including interest, must be tracked as well, not only for your records but also to evaluate debt servicing capacity and future lending opportunities.
Financial Planning and Budgeting
Financial planning and budgeting are also essential components of a company’s financial management process. By preparing a comprehensive budget, businesses can allocate resources effectively, prioritize investments, and make informed decisions about future operations. That said, financial planning involves analyzing historical financial data, identifying trends, and forecasting future financial performance. This process helps companies develop strategic plans, set financial goals, and importantly, monitor progress toward achieving those objectives.
Financial Statement Analysis: Making It Actionable
Of course, numbers alone don’t lead to insights. That’s where financial statement analysis comes in. By reviewing key metrics like profit margin, current ratio, and days receivable, business owners and management gain a better understanding of what’s working—and what’s not.
For example, trend analysis might show that a small behavioral health clinic’s expenses are rising faster than revenue over a six-month period. Ratio analysis could then pinpoint the issue: a bloated payroll-to-revenue ratio after hiring three new staffers before increasing their caseload. With this insight, leadership can make data-informed decisions about hiring strategy, marketing, or operations.
Common Pitfalls to Watch For
Even seasoned business owners and office managers fall into traps when preparing financials. Misclassifying expenses (e.g., listing capital equipment purchase as an operating cost), omitting liabilities, or relying on outdated depreciation schedules can all skew reports and affect tax outcomes.
Moreover, failing to reconcile accounts regularly leads to cumulative errors over time. Inaccuracies compound, especially when year-end reporting or audits come around. That’s why regular financial reviews, whether in-house or through an outside accounting firm, are so critical. These reviews make sure that all necessary disclosures are made, providing clear communication on financial statements (or in accompanying notes), and managing disclosure levels in accordance with accepted accounting standards.
Final Thoughts and Resources
For those seeking additional information on financial statement preparation, there are numerous resources available. Although these are more useful for CPAs than for day-to-day healthcare business operations, the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) provide guidance on accounting principles and financial reporting requirements. Also accounting software, such as QuickBooks or Xero, can aid financial statement preparation by streamlining data entry, automating calculations, and providing templates for financial statements.
Preparing financial statements isn’t just a year-end task or something for tax season. It’s a routine discipline that supports every aspect of your healthcare business—from billing and budgeting to staffing and strategic growth. And while many independent providers may not have the resources of a large healthcare system, they don’t need to go it alone. Working with an experienced accounting partner like Walters can ensure your reports are not only accurate but also truly actionable.
