Financial Management and Planning Foundation: The Chart of Accounts

1. Introduction

Garbage in, garbage out.  More than an acronym for computer data-input error, GIGO describes a plethora of practice management challenges every administrator faces. Your best practice management decisions pivot on methodically-gathered data from your own practice.

Solid data collection systems result in reliable financial information. Over time, trends in the unique financial and transactional information of your practice become the basis of intelligent decisions and strategies.

With a scientific approach to financial data management, you can change the GIGO acronym to one with much more appeal: Good In, Good Out.

Envision what “Good Out” might mean for your practice:

• Good (ethical) standards (business, tax, client, patient, employee, operational)
• Good (reliable) benchmarks of practice and practitioner progress
• Good (healthy) financial decisions from equipment purchases to compensation and benefit arrangements
• Good (unbiased) feedback to doctors and support staff and partners
• Good (accurate) recognition of effort and contribution
• Good (appropriate) fee structure for which guilt and apologies are not necessary
• Good (consistently applied, state-of-the-art) patient care
• Good (timely, appropriate, accurate) client communications
• Good (timely, appropriate, accurate) employee performance reviews and recognition
• Good (replicable, consistent, strong) internal control and operational systems
• Good (attractive, transferable, documented) business methods supporting succession plans
• Good (higher, sustainable, supportable, transferable) practice/goodwill value
• Good (commensurate with risk, effort, time) return on your investment in practice ownership

Good In, Good Out philosophy resides in a time continuum. Like good patient care and like good animal husbandry, practice management is a lifelong activity. One time vaccinations and one time management conference drenchings do not result in a sustainable practice wellness plan or healthy business.

2. The Accountant’s Five Point Plan

Business texts and well-versed advisors recognize five essential managerial elements. The five point financial and operational strategy is based on:

Accounting
Reporting
Comparing
Analyzing
Planning

These five activities evolve into practice management systems, controlling daily, weekly, quarterly, and annual administration and the strategic positioning of the practice as the years proceed.

The accounting element dictates whether the financial and managerial information is accurate and complete. Practice accounting systems are the basis for controlling assets and for structured record keeping.

The second management element, reporting, requires qualified personnel both within and outside the practice to ensure correct summarization of data. Practice leadership decides which reports will be generated in-house and which will occur through the practice’s engaged accountant. The reporting activity requires management to have basic understanding of financial statement interpretation. Standardized practice financial data reporting is important to making informed decisions.

Practice administrators use the comparing and analyzing elements concurrently. Statistics are compared in the practice as well as to outside. Ratio analysis is one of the tools that occurs in a review that preludes the last element of management, planning. Underlying financial and transactional data are compared and analyzed to reassess practice growth, client and patient activity, fee schedules, to establish budgets, and to monitor staff development success, employee relations, and client satisfaction.

3. Accounting Element

“Accounting” refers to the accumulation of data in a meaningful way. Accumulated data is translated into reports that can be used in comparison and analyzing, and finally, in planning for the future. Practice accounting systems must be integrated to efficiently provide a variety of functions:

• Bookkeeping
• Tax reporting
• Financial accounting
• Managerial accounting
• Internal control

In the veterinary industry, data collection from a revenue production standpoint has been greatly expedited and enhanced through the use of computerized systems. Managing and accounting for the expense side of the practice has been a slower evolving segment. With the advent of relatively inexpensive software programs, the ability to accumulate data from both an income and expense standpoint within the practice has significantly improved to serve the variety of functions spanning from client invoicing to tax preparation and internal control procedures.

The foundation for any practice’s financial data management requires a standardized chart of accounts enabling systematic categorization of capital outlays and inflows. A chart of accounts uses numerically organized categories based on the following chronologically listed broad transactional types:

• Practice Assets (what the practice owns)
• Practice Liabilities (what the practice owes outside parties)
• Owner’s Equity or Capital (book value of the residual, i.e., assets minus liabilities, owing to owners)
• Revenues (from veterinary practice operations)
• Expenses (assets consumed to generate revenues)
• Other Revenues and Expenses (not from the conduct of veterinary activities)

The practice’s chart of accounts lists all possible areas of expense and revenue transaction categorization, as well as assets, liabilities, and owner equity accounts. The practice bookkeepers, receptionists, and bill payers, effectively log each transaction using the chart of accounts, whether they are aware of it or not. Bookkeepers usually use account numbers to code each transaction, dependent upon its nature. Timely coding and logged, each dollar-measured transaction builds a story. A definitive reporting date and defined span of reporting time results in data summarization, compiled into financial statements and information transferred to tax returns.

4. How Does a Chart of Accounts Work?

Every time a bookkeeper records a transaction, s/he decides which account title best describes it in a way that creates useful management reports in a cost-efficient manner. For an unusual or unfamiliar transaction, the bookkeeper refers to the chart of accounts as necessary to decide which account title best fits the particular transaction.

Generally, the bookkeeper dates the transaction in the records on the day it occurred. Over a specific period, say a month, all of the transactions accumulate, resulting in monetary amounts in each account. [...]