BALANCING ACT A balance sheet is often described as a snapshot of a business's financial condition.

In health care, we have the medical term "homeostasis" to describe the body's ability to maintain internal equilibrium or stability in the face of external change. In finance, there's also a term for this: the "balance sheet." As an administrator or manager, you need to know what this business basic is and how to use it.

The financial statement, which is primarily used by accountants and business owners, gives you a snapshot of your company's financial position at any point in time. Other financial statements include statement of cash flow, income statement and stockholder equity — which tend to be issued quarterly or annually.

So if you want to know right this minute the financial holdings and position of your facility, you need to ask your accountant specifically for a balance sheet. (Or generate one yourself.)

More likely, you'll need one when a creditor requests information before deciding whether to extend credit for equipment or a loan to expand your facility. Other likely scenarios: if one of your facility's physician-owners were to sell interest, or if a government agency needed information about your facility. Thankfully, understanding a balance sheet (which you can usually obtain with a click of a button on your financial software, such as Quickbooks) is as simple as understanding its 3 most crucial components (see "Sample (Balanced) Balance Sheet" to follow along).

Assets. Your assets comprise all the stuff that you have and adds value, or that you own outright. Instead of listing each item individually, monetary values are grouped into categories and subcategories. These items aren't necessarily what you have on hand — and some of them might not even be tangible.

For example, if you've prepaid your rent or, more likely, your quarterly insurance, that money is counted as an asset. Marketing that you've prepaid but that won't hit the streets until a later date? Also an asset. In fact, even your good reputation in the community — accreditation, a low infection rate and a top surgeon — can be assessed for monetary value and added to the assets side of your balance sheet.

Another asset is cash, which includes what's in the bank for operating capital, and even your petty cash account. No matter how woefully small an amount, it still counts. Money owed to you (better known as "accounts receivable"), the equipment you own, land, inventory? All assets.

They're typically classified on the balance sheet as current assets; investments; property, building, equipment; intangible assets; and "other" assets (the catch-all category, where your prepaid marketing might fall). There can be more categories, but these are the major ones.

When you start to analyze, it gets a bit more complex. For example, you can count some assets as "allowance for doubtful accounts" — money you're owed but that you're unlikely to receive, such as A/R over 120 days. Some accountants will severely discount any accounts over a certain age. Your accountant will know the formulas and apply them to the various overdue A/R (for example, counting 1% of A/R overdue by 6 months), but if you want to generate a balance sheet from scratch, feel free to ask for this information. Mostly, it's important that you're able to read and understand a balance sheet when there's call for it.

Liabilities. Liabilities comprise all the monetary obligations of your hospital or surgery center. They can be short- (what you're paying this month for electricity) or long-term (what you owe the bank over the course of the next 5 years), but include what you'd expect: accounts payable (all your bills), loans you owe on, payroll pending, loan interest and the like.

For primer purposes, we won't get too in-depth here; it's more important to be aware what your outgoings look like, and that other legal and financial definitions may be involved. Hint: It shouldn't be the same as your assets. That's because there's a third component, also found on the right side of your balance sheet.

Equity. Depending on the corporate structure, this can be called one of several names, typically stockholders' or owners' equity. Some even refer to it as the "book value" of the facility or business, equal to assets minus the liabilities. In equation form:

Assets = Owners' Equity + Liabilities
You can also look at it this way:
Owners' Equity = Assets — Liabilities

That is, once you've subtracted your liabilities from your assets, the figure that remains is the value of the business that the owners hold. This figure lets you match up the left and right sides of the financial statement — it's how you ensure the sheet is balanced.

If your ASC had 10 physician-owners, dividing this figure by 10 would provide those physicians the value of their individual shares in the event one wants to cash out. If your hospital-based facility had 4 physician-owners and a hospital partner, you'd be able to determine their shares based on the percentages each owns (for example, 51% to the hospital, 49% divided by 4 for each physician). If a hospital is looking to buy your surgery center, this net book value can provide a guide for the purchase price.

Financial foresight
A note on depreciation: It's subtracted from assets, but counted under assets because it relates directly to the calculation of value for your capital equipment and other capitalized items. You can leave the tax implications of this to your accountants — that's their job. But the next time you get together with your financial advisors, ask if they'd like to add the updated inventory figures to your assets in the books. Watch their expressions — they'll know that you're in the know.