Practice Pro-Forma Accounting Statements

Posted on November 26, 2007 by Dr. David Edward Marcinko MBA

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What are Medical Practice Pro-Forma Financial Statements?

[By Staff Writers]

biz-book1Since a start-up medical practice has no historical financial information, simplified Pro Forma’s are estimated statements that are typically projected for 3 years.  They demonstrate the best care, worst case and most likely financial scenarios of a new practice, clinic, healthcare entity, etc. Computerized spreadsheets are ideal for this task.  Other relevant financial information may be included, as needed. 

 Net Income (Profit and Loss) Statement 

By allocating a practice’s profit or loss into operating groups, banks or investors can isolate profitable revenue centers and isolate unprofitable costs drivers. In certain managed care contracts, an analysis to identify unit or per dollar revenues, gross profits and/or gross margins, is vital.  Other non-cash expenses (i.e., depreciation, amortization and deferred taxes) are then deducted from revenues to determine overall net income. All is included in the income statement.  

Cash Flow Statement 

The Statement of Cash Flow (SCF) projects estimated cash flows by month, quarter and year, along with the anticipated timing of cash receipts and disbursements.  The office’s bills and obligations are paid out of cash flow, not net income.  It is very important for accrual based accounting practices; especially in terms of Medicare, Medicaid, MCOs, PPOs and HMOs producing insurance payment time delays and other aged accounting methodologies.  Cash flow reflects the internal generation of fund available to supply operating capital.  

 Balance Sheet 

The Balance Sheet (BS) forecasts the financial condition, assets and liabilities, of an office at a singular point in time.  It projects the ability to meet financial obligation and the capacity to absorb financial setbacks without becoming insolvent. 

Statement of Retained Earnings 

This is a fourth new financial statement, but it is not usually a pro-forma statement since little cash is generated from a new medical practice

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4 Responses

  1. Joseph, on November 30, 2007 at 1:12 PM said:

    Income Statement Limitations

    Once a practice is ongoing, and no longer in estimated pro-forma financial statement form, the most common limitation of the accountant rendered income statement – even with trained interpretation – is poor classification and categorization.

    For tax purposes, many types of expenses can be grouped together and still render a correct net profit figure.

    As an example, $500 in seminar tuition that is miss-classified as medical supplies expense still renders the correct bottom line but states-states expense in two very different categories. Budgeting and cash flow forecasts may be adversely affected.

    It is common to see income statements that categorize expenses into illogical groups.

    As another example, all forms of insurance expense may be grouped together. Yet auto insurance probably belongs with other auto expenses. Workman’s Compensation insurance is actually a payroll expense. Building liability insurance probably belongs with the other premise(s) figures.

    Using a single insurance category essentially understates all these other expenses and there may not be time, interest or ability to re allocate the insurance expenses more logically.

    So, be careful, especially when buying or selling a practice and relying on financial statements.

    Joseph
    [The Accountant]

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  2. Ward, on February 13, 2009 at 10:16 PM said:

    I am developing a new hospital with physician ownership and am interested in finding a 3rd party source capable of developing a proforma based upon predictable case loads, payer-mix and volume including guidance in design or at least space guidance for this facility.

    Please advise if services such as these are available.

    Ward Schraeder

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  3. Ann Miller RN MHA, on February 13, 2009 at 10:45 PM said:

    Ward,

    Please supply as much additional information as you can about your inquiry.

    For example, specialty hospital type [typically cardiac, orthopedic, urological, etc], location, CON status and time line for completion, etc.

    Contact info with phone number is helpful, as well. You may email us privately.

    Thanks.
    Ann Miller; RN, MHA
    [Executive-Director]

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