Despite being in an industry often considered recession-proof, the extraordinary circumstances of 2020 have led many healthcare organizations to drastically tighten their belts. The coronavirus (COVID-19) pandemic has generated a steady string of state-issued mandates and guidelines, and long-term post-acute care (LTPAC) organizations face mounting expenses related to preventing, managing and testing for the disease.
While your organization strives to provide the best care for residents, it also faces constant pressure to maintain and grow revenues. Sound financial reporting is more vital than ever, so ensuring your financial statements are as thorough and accurate as possible can help you and your team better assess your facility’s overall health, identify inefficiencies and deploy new cost-saving strategies.
What Are Financial Statements?
Generally speaking, an organization’s financial statements reveal its fiscal health. Financial statements demonstrate the results of operations and provide valuable information about the assets, liabilities, revenues and expenses of an organization. This information is used by decision-makers to monitor performance and determine optimal strategies, investments and modifications for continued growth. It is also used by owners, shareholders and others with a financial stake in the organization to keep an eye on their investment.
The key financial statements for a skilled nursing facility are the balance sheet, income statement and cash flow statement. Yet these statements rely on accurate and timely information that is prepared in your facility’s chart of accounts (COA)—i.e., the accounts where transactions are recorded. Before highlighting information and best practices around the balance sheet, income statement and cash flow statement, it’s important to understand how charts of accounts fit into the larger picture.
The Chart of Accounts
The COA is an index of all the accounts listed in a facility’s general ledger. It organizes the accounts into main categories, including asset, liability, equity, revenue and expense accounts, which are further broken down into more digestible subcategories. Each account is given a multi-digit identification code and a brief description.
Account codes usually appear on the chart in the order of assets, liabilities, equity, revenues and expenses. For example, accounts categorized as assets typically start with 1, liability accounts start with 2 and so forth.
The following is a small portion of a sample COA:
Patient Service Revenue
Salaries and Benefits
Although facilities must follow the guidelines for COAs set by the Financial Accounting Standards Board (FASB) and generally accepted accounting principles (GAAP), the number of accounts and the organization of subcategories in a facility’s COA can vary depending on the facility’s needs and the size and segmentation of their business.
Why is it important?
A COA helps to organize a facility’s general ledger and allows you to easily locate specific accounts and record transactions.
A COA does more than just establish an organized system of accounts, however. It supplies the foundation for measuring and quantifying your facility’s performance and extends to every aspect of your organization.
Your COA is used for a number of specific purposes that help your facility run efficiently and profitably, including financial statement preparation, report generation, budgeting and electronic health records (EHR) integration.
COA best practices for LTPACs
Financial statements. Your COA lays the groundwork for compiling all your facility’s financial statements. As stated earlier, the COA organizes general ledger accounts according to balance sheet and income statement elements (assets, liabilities, revenues and equity). Because a COA allows for segmentation according to your facility’s unique operations, it’s important to take care when organizing accounts and assigning account identification codes. It’s possible to have too few accounts or too many accounts based on the scope of services you provide. Intuitive segmentation of related accounts is equally important (e.g., keep all dietary accounts in one area).
Your COA feeds into your performance reports. The better organized your COA is, the more useful your report generation will be. Your COA is particularly useful for completing annual cost reports. Cost reports contain their own COA. If the COA you use for bookkeeping mirrors the accounts contained in your cost report, it will make end-of-year cost report filing that much easier.
Budgets. Budgeting is a crucial process for skilled nursing facilities, particularly in the wake of 2020’s economic turmoil. Budget preparation relies on unit accounts (for number of patients or census) within your COA. These accounts are used to make per patient day (PPD) calculations, an important metric for comparing your facility to the competition.
EHR integration. An EHR system is a powerful tool designed to improve performance and profitability and to help your facility stand out amid the competition. Your COA feeds into the EHR system, which can then produce customized financial reports as well as improved clinical documentation, both of which can result in an enhanced quality of patient care.
The Balance Sheet: Assets = Liabilities + Shareholders’ Equity
A balance sheet shows a facility’s assets (what it owns), liabilities (what it owes) and shareholders’ equity (the amount invested by shareholders) at a specific point in time. According to the balance sheet equation, both sides should always balance such that the value of the facility’s assets should equal the sum of liabilities plus shareholders’ equity. If they don’t balance, there could be missing or misplaced data—or there could be an issue with the report setup pulling the proper account number.
The three main elements are further broken down into subgroups:
Assets are categorized as current or long-term. Current assets, which can be converted to cash within a year, include checking account balances, accounts receivable, inventory and anything considered more “liquid.” Long-term assets include fixed assets such as land, buildings and equipment (less depreciation) and intangible assets or intellectual property.
Liabilities are also classified as either current or long-term. Current liabilities might include accounts payable, taxes owed or loans due within a year. Long-term liabilities might include issued bonds or loans not due within a year.
Shareholders’ equity includes common or preferred stock, retained earnings and any money that can be attributed to owners or shareholders.
Why is it important?
The balance sheet allows you to assess your facility’s overall financial health by providing a quick means to determine if you have enough assets to meet upcoming liabilities. You can also monitor growth by looking at previous statements to see how the numbers have changed over time.
One final note about the balance sheet: It’s important to make sure balances are categorized correctly. For example, if a Due To/Due From is set up as an asset account but becomes a liability, it should move to the liability section of the balance sheet.
The Income Statement: Net Income = Revenues – Expenses
While the balance sheet shows the position of a company at a fixed point in time, the income statement shows all revenues (and gains) earned, as well as all associated expenses (and losses) over a period of time (usually a year or some portion of a year). Subtracting expenses from revenues shows the net income or loss (i.e., the bottom line) for that accounting period.
Why is it important?
Since long-term profit is the goal of any organization, income statements are an important tool for analyzing a facility’s operations and management and for determining which segments, products or services are profitable and which are not. Additionally, it should be used for purchasing decisions—specifically as they pertain to budgets. Comparing revenues and budgets in the LTPAC industry is essential in shedding visibility on money being made (or lost) on certain residents based on payer.
The income statement is also important for ratio analysis. Ratios including gross profit margin, return on assets and earnings per share, just to name a few, can be calculated using income statement figures. Income statement ratios allow you to analyze financial statement details and to get a more in-depth understanding of how well the facility performed during the period and how well it is doing overall.
The income statement may be especially useful for SNFs during economic downturns. While other financial statements are completed annually, an income statement can be updated more frequently, such as monthly or quarterly. This allows you to review revenues and expenses on a regular basis and monitor what areas are underperforming or where expenses are high.
Finally, covenant calculations are also impacted by the performance on the income statement. The income statement is a good indication of cash flow as well (e.g., low revenue leads to low cash coming in, while high expenses can cause issues with cash in future periods). This, of course, assumes that the accrual basis of accounting is followed.
The last primary piece of note within a standard financial statement is the cash flow statement. Essentially, it identifies an organization’s sources of cash during a given period of time. It also shows how the cash was used in all phases of the business—including operations, finances and investments. This statement is calculated differently based on accrual vs. cash basis accounting, but for the sake of most LTPACs, the accrual basis is the more standard basis.
Learn More About Richter’s Skilled Nursing Facility Accounting Services
Do you have questions about accounting and financial statement best practices, general ledger/accounts payable services or other LTPAC accounting challenges? Learn more about Richter’s skilled nursing facility accounting services by contacting us here, or call 866-806-0799 to schedule a free consultation.