Unveiling the Real Story: Utilizing Income Statements for Effective Overhead Management

Hello, it's Kevin Johnson from Leverage Consulting again.

In this blog post, I want to cover something that may be frustrating and confusing to you. I want to shed light on a topic that is often overlooked but incredibly crucial for the success of your practice – understanding the intricacies of income statements.

While most CPAs focus on tax preparation and present income statements tailored for tax planning purposes, it's essential to recognize the disparities between these statements and those designed for monitoring and curtailing overhead.

When it comes to tax planning, CPAs are experts at minimizing your tax consequences. Their crafted income statements may include unique treatments for certain expenses, such as house supply costs and specific overhead expenses. While these practices are completely valid and legitimate for tax purposes, they might not provide the comprehensive insight practice owners and managers need to evaluate overhead effectively.

Let's delve into some examples of the differences between income statements designed for tax planning and those tailored for monitoring overhead:

1.  Supply Costs

In tax-focused income statements,  supply costs might (and most likely) will be treated differently, possibly leading to an inaccurate representation of actual overhead. Understanding the real cost of supplies is vital for evaluating your practice's financial health accurately.

2. Employee Overhead Expenses

Tax-focused income statements might not differentiate between employee overhead expenses that directly contribute to service delivery and those that don't. Monitoring these expenses separately is essential for making informed decisions about staffing levels and resource allocation.  Additionally most CPA produced income statements will include costs associated with the producers which it should separate and exclude for the sake of comparing against industry standards.

3. Expenses Minimizing Tax Consequences

Certain expenses included in tax-focused income statements might not contribute significantly to service delivery. Think of things such as writing off that vacation to Hawaii where you did get some CE or writing off that SUV. Neither of those contribute to the delivery of service for your patients.  However they are both a fantastic tax strategy to minimize your tax consequences.  Identifying and separating those expenses then evaluating their impact on your practice's efficiency is crucial for effective overhead management.  The whole purpose of this is to ensure you have accurate data to compare your overhead to industry standards. Without separating the tax strategies from those expenses that are necessary for the delivery of service, you will be perpetually frustrated chasing a number that is unobtainable.

It's fantastic if your CPA is utilizing the income statement to minimize your tax consequences, but as a business owner or manager, you also need an income statement that aligns with industry benchmarks and standards. An income statement tailored for monitoring overhead provides a clear picture of your practice's financial performance, allowing you to identify areas of improvement and make necessary corrections.

In conclusion, while tax-focused income statements serve their purpose in minimizing tax liabilities, they might not offer the insights needed to manage overhead effectively. As responsible practice owners and managers, it's imperative to work with your CPA to develop income statements that align with industry standards. By having a clear, accurate representation of your practice's financial health, you can proactively monitor and correct overhead when necessary, ensuring the long-term success of your practice.

Stay tuned for more valuable insights from Leverage Consulting.

Here's to informed financial decisions and thriving practices!