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4 Practice Financial Planning Tools for a Smooth Landing on December 31st

Take Steps Now to Avoid Negative Year-End Shareholder Compensation and Tax Surprises With the fourth quarter well under way and the clock running, time is of the essence to chart your financial flight plan through the end of the year. Identify planning opportunities and potential pitfalls, and stay on course to meet your 2014 compensation, […]

Take Steps Now to Avoid Negative Year-End Shareholder Compensation and Tax Surprises

With the fourth quarter well under way and the clock running, time is of the essence to chart your financial flight plan through the end of the year. Identify planning opportunities and potential pitfalls, and stay on course to meet your 2014 compensation, tax and other financial planning objectives. 

A proactive approach eliminates the risk of making decisions under pressure in mid-to-late December, with few options available and too late to take remedial steps. 

Nine months of actual year-to-date data provides a solid foundation to confidently project your financial condition through December 31. Once established, you have the tools at your fingertips to address the following questions, among others: 

  • Are we on track to make our targeted shareholder compensation pool for 2014?
  • Do we need to add more doctor days between now and the end of the year to make our objectives?
  • How much cash flow can be generated by aggressively working down the accounts receivable?
  • Will we be in compliance with bank line of credit and loan covenants as of December 31st?
  • How much income do we retain in the practice for practice valuation and future investment purposes?
  • Will we have the cash and what options are available for year-end shareholder distributions?
  • What are the tax planning opportunities at the practice and individual shareholder level?

There are 4 key projection components:

  1. Financial Statements and Ratios
  2. Practice Valuation at 12-31-14
  3. Federal and State Taxable Income
  4. Shareholder Compensation Pool

All of these features can be captured on one Excel worksheet, updated as circumstances dictate and summarized for shareholder and management decision-making through the end of the year.

1. Projected Financial Statements and Ratios through December 31, 2014

January through September actual year-to-date financial statements, married to your October through December budget — modified as necessary for year-to-date line-item “bleeders” — is the formula to project out your practice’s financial statements through December 31st.

Trust your accounting team to sweat the details; there are only a handful of vital signs that should be on shareholders’ radar screen, with related questions, as illustrated below:

Balance Sheet as of 12-31-14

  • Cash in Bank                           Is this sufficient to fund year-end shareholder distributions?
  • Net Accounts Receivable        Can AR > 90 days be reduced to under 10% by year-end?
  • Line of Credit Outstanding      Are there sufficient reserves for 2015 cash flow emergencies?
  • Shareholders’ Equity               Will equity, or “book value”, increase or decrease in 2014?

2014 Income Statement

  • Net Revenue                           Are net collection % by lines of business as budgeted?
  • Cost of Goods Sold                Are surgical supplies as a % of net revenue as anticipated?
  • Operating Expenses               Have steps been taken to control operating expense bleeders?
  • Income from Operations         Does this cover shareholder compensation and debt service?

You also have the ability to calculate estimated financial statement ratios to determining compliance with bank line of credit and loan covenants, as well as setting the table for negotiating any 2015 financing requirements with your banker.

2. Projected Practice Valuation as of December 31, 2014

Estimate your practice valuation at year-end based on your buy-sell agreement or other valuation formula, and accelerate physician recruitment, retention and retirement planning.

There’s no need to wait on the final 2014 valuation with the issuance of your accountants’ report in 2015 to start the planning process now.

3. Projected 2014 Corporation and Shareholder Taxable Income or Loss

Simple modifications to your financial statements will produce preliminary numbers for calculating federal and state taxable income, and associated tax liabilities. Built into your projection worksheet, these steps can be automatically updated each month through the end of the year.

Collaborating with your tax adviser, make sound tax planning decisions, effectively “target” corporation and shareholder taxable income and associated tax liabilities, and avoid April 15 surprises.

4. Targeted 2014 Shareholder Compensation Pool and Cash Available for Year-End Distribution

As questioned above, is your projected Income from Operations sufficient to cover your targeted 2014 shareholder compensation pool, taking into consideration debt service payments and out-of-pocket capital investments? If not, what steps need to be taken now?

Unless there are compelling tax or business reasons, borrowing money to fund year-end distributions sabotages the financial integrity of your practice and places pressure on cash flow in 2015. Does projected cash flow support scheduled distributions without the need to tap into your line-of-credit?

 

Year-end is stressful enough with the holidays, frenetic clinic schedules and heavy surgical case loads. 11th hour announcements of missed 2014 financial goals and reductions in shareholder compensation seriously undermines the credibility and confidence in your financial management team.

Proactively manage your practice’s financial health by utilizing these predictive tools for a smooth landing on December 31st.