The Importance of Revenue Reconciliation and Accounting
When an architect builds a building, he or she starts with a plan. That plan becomes the foundation and includes all the elements that are required for that building to be constructed—such as the plans for plumbing, electrical, etc. The same goes for your practice. Your revenue reconciliation and accounting are the plan to lay the foundation for a successful, thriving practice and organize all your points of data input so that they all are all aligned. When your data is all synchronized, you can access any pertinent information you need within minutes, which is one of the most critical financial foundations.
Three elements of Financial Foundations
There are three key elements to forming a strong financial foundation. The first element is your service categories which we covered in another recent blog article (you can read it here). The second element is your practice management point of sale system or your practice management software and the third element is the chart of accounts.
Your chart of accounts informs your accounting as well as your profit and loss (P&L). When all three of these elements (service categories, practice management software and chart of accounts) are all are in place, you will be able to achieve the following systematic benefits:
Maintain your key performance indicator (KPI) reports
Ensure your numbers are clearly aligned with your compensation goals
Know your return on investment (ROI) for your marketing campaigns
Manage your internal benchmarks
Save time, and time equals money
Most of the time when we first work with clients, we find that their spending is out of whack and that’s understandable as most clients do not have their P&L statements in good shape. Our goal is to get your chart of accounts and P&L aligned with industry standards so that you can ultimately generate more revenue, reduce expenses and make informed decisions.
When you look at your P&L statement, you should be able to take a quick glance and within 20 to 30 minutes be able to determine:
What is working and what isn’t
Where you can reduce expenses or increase them
Whether or not you are aligned with industry benchmarks
If your business is on track to make the profits that you want to make
Sh*tty versus Pretty P&L Statements
For those of you who have been around our tribe for a while, you know we tell it like it is and don’t beat around the bush. There is no judgment, just education because we understand that you don’t know what you don’t know. And our job is to educate. There are two kinds of P&L statements we see when we take a look at our clients’ financials: Sh*tty ones and pretty ones.
Sh*tty P&L statements have all of your revenue in one bucket and all of your expenses in another. While that is the basic idea behind a P&L statement, the problem is there is no way to get any other information from that type of basic statement. If all of your revenue is listed on a single line item, you cannot break it Rossn to see which segments are generating the most ROI. For example, if your business is doing 2 million and we asked you what percentage of that profit is from injectables or body contouring procedures, would you be able to tell us? Likely, you would not. That’s why it is so important to be able to segment out your business so that you understand what percent of your revenue or total compensation you are bringing in from your net profit for each service.
Moving over to the expenses side, when they are all clumped together into just one line-item, there is no way of knowing certain specific data. For example, what your payroll costs are. Did you know that industry benchmarks for payroll should be under 30% of your total expenses? When we dig into these types of questions when reviewing sh*tty P&L statements, we sometimes find payroll costs of up to 55%. At that rate, you could go bankrupt.
A pretty P&L:
Segments your business into different line items for each category of service for both revenue and expenses so you can clearly understand what’s working and what’s not
Allows you to see your gross profit versus your net profit
Utilizes industry benchmarks
Help uncover areas for potential savings by identifying areas of waste
Allows you to determine your cost of labor
Truly identifies and helps you to understand your break-even point so you know exactly how much you need to bring in to pay all of your expenses
This, of course, is just a basic overview. We go into much more detail as well as include examples of a Rossnloadable “pretty” P&L statement in our Financial Foundations course.
P.S. We are so excited to announce something BIG that will help you understand the value and importance of financial health for your practice and so much more.
Let’s continue to grow together!