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NET INCOME STATEMENT AND BALANCE SHEET ADJUSTMENTS
By Dr. David Edward Marcinko; MBA MEd CMP®
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SPONSOR: http://www.MarcinkoAssociates.com
Net Income Statement Adjustments
When analyzing a set of financial statements to determine practice value, adjustments (normalizations) generally are needed to produce a clearer picture of likely future income and distributable cash flow. It also allows more of an “apples to apples” line item comparison. This normalization process usually consists of making three main adjustments to a medical practice’s net income (profit and loss) statement.
1. Non-Recurring Items: Estimates of future distributable cash flow should exclude non-recurring items. Proceeds from the settlement of litigation, one-time gains/losses from the selling of assets or equipment, and large write-offs that are not expected to reoccur, each represent potential nonrecurring items. The impact of nonrecurring events should be removed from the practice’s financial statements to produce a clearer picture of likely future income and cash flow.
2. Perquisites: The buyer of a medical practice may plan to spend more or less than the current doctor-owner for physician executive compensation, travel and entertainment expenses, and other perquisites of current management. When determining future distributable cash flow, income adjustments to the current level of expenditures should be made for these items.
3. Non-cash Expenses: Depreciation expense, amortization expense, and bad debt expense are all non-cash items which impact reported profitability. When determining distributable cash flow, you must analyze the link between non-cash expenses and expected cash expenditures.
The annual depreciation expense is a proxy for likely capital expenditures over time. When capital expenditures and depreciation are not similar over time, an adjustment to expected cash flow is necessary. Some practices reduce income through the use of bad debt expense rather than direct write-offs. Bad debt expense is a non-cash expense that represents an estimate of the dollar volume of write-offs that are likely to occur during a year. If bad debt expense is understated, practice profitability will be overstated.
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Balance Sheet Adjustments
Adjustments also can be made to a practice’s balance sheet to remove non-operating assets and liabilities, and to restate asset and liability value at market rates (rather than cost rates). Assets and liabilities that are unrelated to the core practice being valued should be added to or subtracted from the value, depending on whether they are acquired by the buyer.
Examples include the asset value less outstanding debt of a vacant parcel of land, and marketable securities that are not needed to operate the practice. Other non-operating assets, such as the cash surrender value of officer life insurance, generally are liquidated by the seller and are not part of the business transaction.
SPEAKING: Dr. Marcinko will be speaking and lecturing, signing and opining, teaching and preaching, storming and performing at many locations throughout the USA this year! His tour of witty and serious pontifications may be scheduled on a planned or ad-hoc basis; for public or private meetings and gatherings; formally, informally, or over lunch or dinner. All medical societies, financial advisory firms or Broker-Dealers are encouraged to submit a RFP for speaking engagements: CONTACT: MarcinkoAdvisors@outlook.com
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Filed under: "Ask-an-Advisor", "Doctors Only", Accounting, CMP Program, Drugs and Pharma, Funding Basics, Glossary Terms, Health Insurance, Healthcare Finance, Investing, Marcinko Associates | Tagged: Accounting, bad debt expenses, balance sheet, bookkeeping, expenses, finance, Income, income statement, Marcinko, medical practice, medical practice practice valuations, non-cash expenses, perquisites, practice appraisals, revenue | Leave a comment »
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