MAKING A FORTUNE
FROM YOUR FINANCIALS
UNDERSTANDING AND BUILDING
PERSONAL WEALTH
Jon Dittrich, MBA
NABA EXECUTIVE EDUCATION
A balance sheet is like a snapshot from a camera: it shows your practice at one moment in time. It also shows
whether you are accumulating wealth in your practice. There are three major groups of figures in the balance sheet.
They are assets, liabilities, and net worth. And, in fact, the reason they call this a “balance sheet” is because the total
amount of your assets equals the total amount of liabilities plus the total amount of net worth. And when assets equal
liabilities and net worth, we are set to be in balance.
Assets
So what is an asset? Very simply, an asset is anything you own. This would include, for example, drug inventory,
computers, cash in the bank, medical equipment, accounts receivable, office supplies and furnishings, and land and
buildings. All of these things you can touch and see, and they are needed for your veterinary practice.
We further break assets down into short-term (or current) assets and long-term (or fixed) assets. A short-term asset is
an asset that will convert to cash within a year. A long-term asset is something that takes longer than a year to
convert into cash. Using our definition, we discover that items such as drugs, inventory, cash in the bank, and
accounts receivable all should turn into cash within a year, and therefore they are current assets. Assets that take
longer than a year, or will last longer than a year, are things such as computers, medical equipment, office furniture,
and land and buildings.
Now to apply this concept, let’s see what the asset portion of a balance sheet looks like. The first things on the
balance sheet are the current assets. Instead of pictures of the items, we just have numbers representing their value.
In our example, we have cash in the bank at –$794.62, petty cash of $500, and a nice money-market certificate of
$20,000. When I total all of my checking and savings accounts together, I get a total of $19,705.
Another current asset is accounts receivable. Accounts receivable comes from the work we have done for clients but
have not gotten paid for yet. In essence, it is like a short-term loan to our clients. In this case, we have $84,231 owed
to us by clients. (Hint: I hope this does not happen in your practice. Otherwise you will be out of business.
Veterinary medicine should be a cash-and-carry type of business.)
The last current asset is drug inventory. Drugs should turn into cash within a year, and here you can see we have
$25,000 of drug inventory. If we total my checking and savings, plus accounts receivable, plus drug inventory, the
total of my current assets is $128,936. So far, so good.
All right, let’s shift to the second component of assets, which are fixed assets. If you will remember, fixed assets are
those assets that take longer than a year to use up or turned to cash. Not surprisingly, my $120,000 of furniture and
fixtures should go here, and my $750,000 land and building also go here. Together, these figures total $870,000.
Finally, I have a category here called “other assets.” We have goodwill here. Goodwill is the amount in excess of
what I paid for the assets when I bought a practice. In this case, I paid $150,000 over the value of the assets when I
bought this practice, because it was an ongoing concern. I put that under “other income” because it is an asset. In
this case it is considered an intangible asset, because we cannot actually touch that goodwill. However, it does have
a value. Don’t get concerned about goodwill and other assets. I just wanted to mention it here so that you would
have an idea of where they go and what it means. Total assets equal $1,148,936.
Liabilities
As mentioned above, the balance sheet has three categories. Assets was the first, and the next is liabilities. We are
going to talk about that here. If you remember, assets are anything you own. A liability is anything you owe. Let’s
look at what some of these look like.
Places where you owe money could be accounts payable, and that is money you owe vendors. A liability could be a
line of credit to the bank, or it could be a building loan, an employee loan, or an equipment loan. The key is that
liabilities usually are either payables, which means you have the product but have not yet paid for it, or they are
loans, where someone has loaned you the money, and you have to pay them back. All of these are categories in
liabilities.
It should not be surprising that we break those up into short-term and long-term liabilities. A short-term liability—I
bet you can guess the answer already—is money you owe within a year. Your credit-card bill is a good example.
The credit-card company loans you the money to make your purchases, and then you will pay them back within a
month (hopefully)! And a long-term liability is money that you have more than a year to pay for. A car loan is a
good example of a long-term liability. Next we will break our previous categories into long-term and short–term,
and I bet you could do that on your own.
Accounts payable, line of credit, taxes payable, and employee loans would all be short-term liabilities, because
hopefully those will all be paid off within the year. However, some loans can’t be paid off within a year. Those are
your building loans, equipment loans, and, if you had to borrow money to purchase your practice, then this loan as
well. All of those terms last more than a year and go into our long-term liability category.
On a balance sheet, first we have current liabilities, things we owe within a year, and in our example we have two
items that we have to pay within a year. One is accounts payable, money to vendors such as Merial and Pfizer.
When we buy products, we have to pay for them by the end of the next month. We owe them $60,520. The other
current liability is our payroll liability of $3,217. When I issue my payroll checks, I have until the 5th or the 15th of
the following month to send the taxes to the government. And that is called a temporary loan from the government
to me until I pay it. It is called a liability.
Then we have our long-term liabilities, those items that will take me more than a year to pay. If I look at my
building loan and equipment and practice loans, in our example I see that I owe $975,500 in loans so far.
And finally, if I total the short-term and long-term loans, I owe a total of $1,039,237. That is a lot of money! It takes
a lot of money, and you have to borrow a lot of money, to purchase and start a veterinary practice, as you can see.
Owners Equity, or Net Worth
There are two common terms used for the last section in the balance sheet. You may hear the words “owners
equity,” and you also may hear the words “net worth.” For our purposes, owners equity and net worth are the exact
same thing. They are different terms, but they both mean what is left of the practice on the balance sheet. The most
important thing about net worth is that net worth shows the wealth of the owner. When someone is becoming
wealthy in a practice, it means their net worth is growing. The faster net worth grows, the quicker the owners
become wealthy. If net worth goes down (and it can go down), then the owner is becoming poorer. So obviously, the
goal of all veterinarian owners is to increase net worth, and there are a couple of ways to do that.
First, let’s look at what the owner’s net worth consists of. It usually consists of three different items: capital stock,
retained earnings, and net income. Capital stock is money that comes out of the owner’s pocket when the practice is
first started. For example, if an owner starts a $1 million practice, and puts $100,000 of his cash in and borrows
$900,000, we would see, under capital stock, $100,000. That is the money the owner physically put into the
checking account to get the practice started. He can add to that amount as the years go by, or take money out from
that account as the years go by. But it is physical cash the owner has put into the practice.
The second category is retained earnings. When a practice makes money, it adds to the wealth of the owner. So,
retained earnings consist of the summation of all the previous profits and losses of the practice after it began
ownership with the current owner. The owner may choose to use the retained earnings of the practice to pay off
debt, to buy assets, or just to grow the checking account. Retained earnings simply are those profits that were
generated in the practice.
Finally, we have net income. Retained earnings are the cumulative summation of previous years’ profits or losses,
while net income is this year’s profit or loss. Then, at the end of the year, we will put the total profit or loss for that
year into retained earnings, and net income starts at zero again. So, if at the end of the year, I made a $100,000 profit
on my balance sheet under net income, it would show $100,000. Then, on January 1 of the following year, my net
income would be zero, and retained earnings would go up by $100,000. In our example, we just have two areas here.
They are our common stock of $104,000 and our net income of $5,699 so far. This practice in the example is
probably new, because we do not yet have any retained earnings.
Net worth is the difference when you take all your assets and subtract all your liabilities. For example, if we took
this balance sheet, which had total assets of $1,148,936, and subtract liabilities of $1,039,237, we would find that
this owner has a net worth of $109,699. It is in balance.
As I mentioned, the goal for any business owner is to increase wealth. The fastest way to increase wealth is by
having a profitable business. You can increase wealth much faster by having a profitable business than by making
more money as a salary. And that is because the business can make far more money than your salary if you handle it
well and make good management decisions. All new millionaires made their money not from working harder for
someone else but from owning their own businesses.
Remember our balance-sheet formula: Assets = Liabilities + Net Worth. If we wanted to solve for net worth, that
equation would be Assets – Liabilities = Net Worth. There are two ways of creating wealth. We can either increase
assets or we can decrease liabilities. In other words, I can increase what I own or decrease what I owe. For example,
if someone would give me a boat, then all of a sudden I could own a $10,000 boat and my wealth would increase.
However, if I borrowed $10,000 for that boat, my wealth does not increase. Even though my assets increase
$10,000, what I owe increases $10,000 also, and the net is zero.
The other way to increase wealth is to reduce your debt. In our current society, we went on a debt rampage. That
came to a screeching halt in 2008. Now we are all licking our financial wounds and realizing that borrowing our way
into happiness didn’t work, and we are now paying the price with our lousy economy. So what we are doing now is
paying off debt, and by paying off debt and not buying anything else new, we are increasing our wealth.
Are we in balance? Looking at our balance sheet in the example, we can see that, yes, we are! Our total assets are
$1,148,936, and that equals liabilities of $1,039,237 plus net worth of $109,699. Get a calculator and you will see
that they match.