Building a management-focused Profit and Loss Statement

An accurate, easy-to-understand Profit and Loss Statement (P&L) is a crucial management tool for both the medical practice administrator and the physician owner(s). Unfortunately, many P&Ls are difficult to understand due to the way they are set up in the standard Quickbooks accounting systems, which do not segregate costs into easy-to-identify major categories and often present too much detail that confuses the users. 

This article sets forth a best practices model for structuring a P&L that highlights key revenue sources and expense categories. It segregates costs into major categories; separates clinical and nonclinical expenses; compares this period with the same time period last year; and highlights the dollar and percent differences in each revenue and expense category. In addition, it shows cash flow, a key metric that is not included in the standard Quickbooks-produced P&L.  

Key components of a management-focused P&L

1. A limited number of major expense categories with subtotals for each. Use of a four-digit chart of accounts numbering system to group like expenses, as illustrated at right:
2. A comparison column listing expenses for the same period last year. A column listing the dollar difference this period versus last year, and a column listing the percent difference in dollars this time period versus last year.
3. A calculation of Cash Flow below the Net Income line that subtracts estimated taxes and principal payments on debt from Net Income. An addition to the net income line of non-cash expenses such as depreciation and amortization, as well as any loans received (such as the COVID-era Payroll Protection Loans). These steps must be done manually; neither Quickbooks nor an accountant’s IRS Schedule C will add these to the standard P&L. 
4. Owner-specific focus. Ensure your listing of expenses breaks out owner salary and associated payroll taxes from the rest of the staff wages and payroll taxes.
5. Exclusion of carryover expenses from previous years for a current-year annual P&L statements. Accountants frequently do this because certain carryover losses are tax deductible and will simplify their work for annual tax filings; however, this will distort the actual profitability measurement for the practice.  

The P&L should estimate taxes on Net Income; these average 35% to 40% (federal and state total). The Depreciation/Amortization numbers will come from the accountant’s depreciation schedule and may be estimated based on the past year’s tax return.

In addition to monthly and annual reports, P&L reports that roll up prior months in the calendar year are very useful management tools, as are quarterly and semi-annual reports.