Thinking about buying a veterinary practice or clinic? Looking at the financials will be important in your due diligence – including the latest balance sheet.
No one document can tell you if a practice is worth your investment of time, energy, or dollars. But each financial report provides clues to the financial health of the business – including the balance sheet. Not sure exactly what it provides? Let’s look at it.
What is a Balance Sheet?
Assets. Liabilities. Equity. These three components together provide a snapshot of the resources available to a veterinary practice/clinic’s owners plus how those resources were financed. Is this a wise investment? The balance sheet is one component to help you make that decision. Specific things to know about a balance sheet:
- It is a summary of the business at a specific point in time only.
- It should always “balance,” meaning that assets should equal liabilities added to the owners’ equity (Assets=Liabilities + Equity).
- Important elements in the report include cash on hand, accounts receivable, drugs and medical supply inventory, equipment, payroll, and taxes.
- Layouts can be done in one of two ways: either side by side (left column contains assets and right contains liabilities/equity) or in “report” format (assets start at top of the first page, followed by liabilities and owner’s equity).
The American Animal Hospital Association (AAHA) and American Veterinary Medicine Association (AVMA) provide sample financial reports at no cost to help vet practices/clinics have a standard approach (see their sample balance sheet in “report” format with additional info below).
How to Read a Balance Sheet
The balance sheet provides significant insight into the practice’s fiscal health as of the date on the report. A balance sheet has three sections: assets, liabilities , and equity:
1. Assets
Assets are anything the practice/clinic owns that could be converted into cash, called liquidation. Assets are usually positives on the balance sheet (though there are such things as “contra assets”) and are divided into current and noncurrent assets:
- Current assets can be converted into cash within a year, such as cash on hand, marketable securities, drugs and medical supply inventory, and accounts receivables.
- Noncurrent assets, such as real estate, medical or office equipment, and depreciation, are assets that are “fixed” or not expected to be convertible to cash within the year.
2. Liabilities
Liabilities are what a business owes, obligated to pay, and are an inverse of the assets. These are tallied against the balance sheet. Liabilities are also current or noncurrent:
- Current Liabilities include wages payable, debt financing, rent payable, utility payable, accounts payable, and other costs.
- Long Term (or “Noncurrent”) Liabilities examples could be long term portions of loans and deferred tax liabilities.
3. Owner’s Equity
The owner’s equity is what is left over when you subtract liabilities from assets, including common stock, distributions, dividends, and draws. In summary, owner’s equity is anything belonging to the business owners after any liabilities have been taken into account.
