The MedMan Podcast_The Importance of a Month-End Close: Audio automatically transcribed by Sonix

The MedMan Podcast_The Importance of a Month-End Close: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Jesse Arnoldson:
Welcome to The MedMan Podcast. A podcast focused on helping you level up your practice. I'm Jesse Arnoldson

Jay Holmes:
And I'm Jay Holmes. Through interviews with some of the most successful leaders in the industry, we help uncover resources, tools, and ideas to help you level up.

Jesse Arnoldson:
Thanks for tuning in and we hope you enjoy today's program.

Jesse Arnoldson:
Hello everybody, welcome to The MedMan Podcast, I'm your host Jesse Arnoldson. This week, we're going to jump into the nitty-gritty of practice financials and I'm joined here today by our MedMan CFO, Jay Holmes. Welcome, Jay.

Jay Holmes:
Hey, man. Good to be here. Good to chat with you. A little sidebar, everybody out there today is March 26th, 2021. Our good man, Jesse, just had twins. He's four days into it. They're having five children. So, you know,

Jesse Arnoldson:
That's why my voice is lower and I'm going to talk a little slower. I'm just so tired.

Jay Holmes:
Yeah. Well, congratulations man on officially here.

Jesse Arnoldson:
Thanks, buddy. I appreciate that. You guys. Let me give you a little bit of a reminder about where Jay comes from. Jay is MedMan's CFO. He is a CPA accountant, and that is his background. He actually came from public accounting, owning his own accounting firm. Jay, anything else you'd like to add to that?

Jay Holmes:
Well, yeah, it's a good start. Certainly spent a lot of my time thinking about business processes and efficiency and effectiveness, right? And in the accounting realm, controls and setting up processes gets you, really the stronger your processes are, you know, the less risk you have on diverging from really good information, solid information. So it's really about always trying to find different ways to do things better and a little faster so that you can retain the quality. So that's where my head's been for the last 20 or so years.

Jesse Arnoldson:
Fantastic. And that's going to serve us well today as we're going to jump in, in this episode, we're going to start talking about what a month-end close is and why it's so important. Jay, can you maybe help us understand a little bit better, what what do you mean by a month-end close, and why are we talking about it today?

Jay Holmes:
Well, Jesse, good question. And let me try to do my best here, answering that. A month-end close, how I look at it, I tell a story of if you're a card player, whatever game you play, you know, you have a deck of cards. And usually, unless you use the same deck of cards day in and day out and you have confidence in how many cards are in that deck, you generally start off by counting the deck. Before you really play this game, you want to make sure that you're playing with a full deck of cards. And I think that's the same thing as a month-end close, is that before you really start to analyze and look over your data, your financials, you want to make sure that all of those 52 cards are counted and are there. And so that's really what the month-end close is doing for you. It's giving you, it's elevating your confidence that the data that you're actually looking at, the data that you're making decisions for your business is accurate and consistent. And without that, it's pretty hard to play certain card games. Most all card games. If you're missing three or four cards, hate to be waiting for that ace of diamonds and then realize it's not in the deck. You know, that's certainly not a good, good pathway. So that's really, what, a month-end close is. It's taking all the information and going through these steps to really ensure that your financials, you know, when we're thinking about the balance sheet, P&L, and everything else that you pull from that to your metrics, that they're consistent and they're accurate. And that's really what we're looking for.

Jesse Arnoldson:
That makes a lot of sense, Jay, what, help me dive into it. What does it involve to go through and kind of close the books at the end of a month?

Jay Holmes:
So having an accounting background, I think that the process I go through might be a little bit more involved than most practice administrators. And that's just because of the depth of knowledge of really accounting and how it works. But what I'm going to tell you right now, I think it's really important to understand. I think a lot of people what they look at is they look at the P&L. And because that's what drives comp models, that's what drives overhead budgets and all that stuff. But really to ensure that your P&L is correct, what you need to do is go through your balance sheet and make sure that your balance sheet, all those accounts are accurate. Because the nature of a balance sheet it's an accumulation overtime to get you to a certain balance at a certain date. Because of the nature of that, you can actually verify what a balance sheet should be when. I give you an example, you can verify through a bank reconciliation that your bank account matches what your bank statement is, pending transactions and in-transit, right? So you can verify, hey, on January 31st, my bank statement says this, EquiPick says this, and I understand those transactions that are different. You can go to your loan statement, your amortization schedule and say on this date, it should be 126,000 dollars. Then you can look at your balance sheet and say, well, on this date, does it, right. So the balance sheet allows you to really count that deck of cards for each account. And then once you know that your balance sheet is correct because of the nature of those accounts, then you know that all your cards, all that revenue and expenses, or at least in the income statement, right. And so that's really the balance sheet is really counting on, counting all the cards. And once you get through that, then you move on your profit loss, so the first step in the month-end close is really going through your balance sheet and there's bank reconciliation's, credit card reconciliation's, and then depending on how complex things go or your organization, there can be a lot more steps involved in that. Unfortunately, here at MedMan, in some of the clinics we work with, in the clinics we own. Yeah, the month-end close is something that can take a couple of hours to a couple of days. And so it doesn't have to be this drawn-out long process. So really, you're looking at the balance sheet.

Jesse Arnoldson:
Jay, I'm going to insert right there.

Jay Holmes:
Yeah, please do.

Jesse Arnoldson:
We, I know for me and you help me set up my month-end process that used to take me a couple of days and I'd start on whatever day the fourth, you know, maybe on a Monday when the new month starts and it would be by the end of the week, I'd have things done. And now through processing that you're talking about, that that's been on your mind, simplifying things, figuring out how to do it the same way every single time, getting faster. Now it takes a morning, maybe less, to do it. And that was always the goal. We didn't want this to be a process that was always four days long, right?

Jay Holmes:
Absolutely. And let's talk about that a little bit. And why is it three or four days long? Well, you know, part of it is that you do it once a month and it's not always fresh on your mind. So you're kind of relearning things, you know, like how what is

Jesse Arnoldson:
How some memory isn't there, right?

Jay Holmes:
Yeah. And the things that you thought you were going to do or the reason you did a certain thing, you scratch your head and you spend some time relearning that. And so that's where the documentation comes from. And really just having the process really helps. So really what we do is we take the balance sheet approach first and really just create an Excel workbook and use the snipping tool. And basically, every single tab on your Excel workbook is a balance sheet account that you see on your balance sheet. And so what you do is you set up, you're essentially going through each account and you're saying, what's the level of assurance that I want to make sure this account is accurate? And that's really kind of coming from the auditing world and public accounting. But that's what basically what you're doing is you're saying, hey, if I do these steps, I can feel X-confident that this account is correct. And there's always a cost-benefit analysis, right, because no matter what, you can always overdo it. But most of the time, 90 to 95 percent accuracy, that confidence level is really what you're looking for. And so you build up this work paper and you say, OK, well, now I have a template. I know what to do for every single account. And once I get through all these tasks, then I have a high level of confidence that everything that's in, that we have 52 cards in the deck. OK, then what we do is we move on to the P&L and the nature of the income statement or the profit and loss is that it's harder to pinpoint if the buckets or the account totals are accurate, because we're looking at what has happened over a specific period of time. It might be a month, it might be a quarter, might be a year. So it's harder to go in and double click it in an account and say, hey, is that balance accurate? Well, it just depends. Did we have that transaction in this period or not? And so what we tend to do there is that it's more of an analysis of does this make sense? And so once we get done with a balance sheet, we move to the P&L, we break that up, and we generally look at a 12-month rolling, rolling 12 months by month. And what you're looking for there is you're saying, OK, well, now that I have 12 months of data, I can compare what this month looks like compared to the last 11 months. And so for some accounts, you're going to say, hey, wow, that number is a lot higher than it usually is. And that's an indicator that you should look into that. So double click on that account. Did something get put in there that wasn't supposed to? Did you buy a fifteen thousand dollar piece of equipment that probably shouldn't go there? It should go in your balance sheet? Or did you put in some software expense that should go in I.T. expense rather than office supplies, right, instead.

Jesse Arnoldson:
Whether you forget to pay a bill, right, there's mine.

Jay Holmes:
Well yeah.

Jesse Arnoldson:
Was there a zero there? Oh, no!

Jay Holmes:
Totally. And so it goes both ways, right? Is something in there that shouldn't be in there or is there nothing in there that really there should be something? So you'll go along and you have a two thousand dollar expense and all of a sudden this month there's nothing there. Right. So then those are the types of things that really help you make sure that everything that is there that should be and everything that's not there shouldn't be there. And so it's more of this, you know, it's an analysis. And basically there's some common sense that runs through it, right. So you've got insurance and insurance balloons every three months. Well, sure. That's the schedule of paying certain insurance or you have rent and one month there's no rent payment. Well, that makes no sense, because the last time I checked, your landlord isn't one to say, hey, every tenth month, just don't pay me. I'm good with that. Right. So there's a schedule and a frequency. And if you put all that together, then through that process, it really gives you the confidence that, hey, now what we're looking at is consistent and accurate. And I say consistent first, because it's one of those things we get an argument from time to time of, well, I think this expense should go in this bucket and I think that expense should go in that. And at the end of the day, you, know, I think as long as it goes in a bucket and of course, there's certain things I'm not generalizing here, but for the most part, once you pick a path, it's a lot more important to stick with it than every month to try to find a better path, because, again, it's about comparing month to month. And so consistency is going to allow you to see the errors a lot more frequent.

Jesse Arnoldson:
The consistency is also we're going to give you the muscle memory to get better and faster, right? I mean,

Jay Holmes:
One hundred percent. Yep.

Jesse Arnoldson:
Awesome. Jay, tell me, where do people mess up the most? What areas get missed the most often?

Jay Holmes:
Great question, Jesse. There's a couple areas. And I think the first is, is not even looking at the balance sheet. Plenty of practices that have gone into to review the financials, I look at the balance sheet and I see, you know, for example, I've seen an eighty thousand dollar negative balance in a 401(k) payable account. So what's that really mean? Well, a payable account is generally set up and it should have a positive balance. And it means that you owe someone something, right? You've recognized an expense and you haven't paid that yet. So you're going to pay it in the future. What happens if you have a negative 401(k) balance? Well, that means that you've paid something without recognizing as an expense. So what this practice do, this practice was short on cash and they were wondering, well, how can we don't have no cash? Well, based on their comp model and how they generally needed to distribute expenses, they had about whatever it was, 50, 60 thousand dollars that never showed up on their income statement. And so they were paying distributions to the owners, providers that didn't account for the money that they paid for retirement. Right. Caused a big issue. And so those things happen without because it's like a black hole. If you're not looking at the balance sheet, QuickBooks or whatever accounting system you use makes it really easy to feel like you're doing everything right because all you have to hit is OK. Yes, save and close. Done.

Jesse Arnoldson:
Yeah,

Jay Holmes:
I don't have to think about it. But in reality, that transaction went to 401(k) payable rather than 401(k) expense, and those have a drastically different outcome. And so the first thing is really just review your balance sheet. And it doesn't mean that you have to be a CPA or expert accountant. You just need to know and get some help with it. So reach out to your accountant, say, hey, help me understand this account better. I'm interested in that account better. And that's where this workbook comes in. You can actually have them help you go through it. Then once you have the workbook that's going to provide that that support, that background now that you're going to understand, hey, what should I expect in this account or that account? So that's one area. You know bank reconciliations, one of my favorite topics is bank reconciliations because every single company has money coming in out of the bank and most companies have credit cards. And so it's a bank reconciliation or credit card reconciliation. But the nature of accounting and bookkeeping from the bank account is that you often record transactions that take some time to actually clear the bank. So you write a check. Right. And sometimes it takes a couple of weeks for it to clear.

Jesse Arnoldson:
Yeah.

Jay Holmes:
And how, now how we're interacting with our accounting software through bank feeds and through automated transactions. There's opportunity for those. And there was opportunities before, don't get me wrong, when most of it was manual, but there's opportunities for things to get duplicated in the accounting software. So a bank reconciliation, you know, I think what most people do is they race to get the zero difference, right. Like, is there a difference between what the bank statement says and what you're reconciled balance says. And once it gets to zero, everyone thinks, aha, I did it, I got there. But you miss a key piece. And that key piece is that you have to dive into the unreconciled items, one of the most not highlighted misunderstood areas, because what an unreconciled item is, is just that, there's a transaction that has yet been reconciled. It has yet, it's in your QuickBook's account or your accounting software, but hasn't cleared the bank. What that represents is potentially something that could have been duplicated. It could have been entered in error, right? But that transaction has another side to it. Right. accountings two entries. So there's an entry in the bank account, but it also is showing up somewhere else. So what is so important and so needed in the bank reconciliation process is before you get done is you review all those transactions that are unreconciled, that you haven't checked, that are especially older. And this is a lot of common sense. Right? You go through and you say, OK, well, I've got a deposit for three thousand dollars that has not been recorded or that has not been reconciled. And you think back and you say, how many practices out there are going to go a day or two or three without actually making that deposit or a week, right? It doesn't make sense you have deposit four months old that isn't cleared yet. Just doesn't make sense.

Jesse Arnoldson:
Right,

Jesse Arnoldson:
Right. Same thing, you think about payroll. You've got a eight hundred dollar payroll check that isn't cleared. Well, I know that there's some random individuals out there that don't need the money or don't want the money or don't care, but it's very, very rare.

Jesse Arnoldson:
They exist.

Jay Holmes:
They do because I've run across them. But at the same time, it's very, very rare. It's an exception, certainly more than the rule. And so you think about that and you kind of go through this common sense analysis of does it make sense that these checks haven't cleared yet? Well, refund checks, you bet. You see that all the time. You got refund checks that are just sitting in the accounting software because might be for 15 bucks or thirty-five bucks and someone just maybe didn't get to the person, maybe it did, but it's just sitting in their desk and it got lost. But you've got an eight hundred dollar check to a vendor that's two or three months old. It's possible it's still sitting out there. But it's also possible that when the transaction came across or when you went in and did the reconciliation, maybe it came across your bank is eight hundred and ten dollars by mistake. And so now you have eight hundred ten dollar expense and eight hundred dollars expense. Right. And what's that doing to your financials and what you're looking at? It messes them up. It certainly muddies the water. And so to dive into those unreconciled items, just to understand and just ask yourself, does that make sense that this type of transaction wouldn't have cleared yet? And if it doesn't make sense, then all it urges you to do is go to your bank register, search for that same exact amount, and maybe you'll see two transactions that are in the same month. One of them's cleared and one of them's not, probably a result of you entered it twice or other ways or that you just want to investigate and say, you know what, should I delete that? Or is it actually a valid transaction

Jesse Arnoldson:
Jay, to throw a little bit of a curveball at you, what kind of symptoms would you look for in a clinic or any business for that matter, where they may not have this dialed in? What might be happening that would indicate that something's not going right in the month-end close?

Jay Holmes:
Well, funny ask. You know, we actually have an assessment module that is specifically for this. We've got about 18, 20 questions know. But the first place to start is really getting your last bank reconciliation. Look at if there's any unclear transactions and then looking at your balance sheet and really assessing do you have negative accounts that just shouldn't be that way? Do you have accounts that you have no idea what they are? You know, spend half an hour looking at your balance sheet and just asking the question, what is this and why? That's a good place to start. And if that results in more questions, then certainly you know that you have more work to do. If it doesn't, you say you don't feel good about everything, then I think, you know, you probably have a pretty decent handle on it. But I think those those are the two areas that would start. And then, of course, just doing that review on a month-to-month basis, if you haven't done that. Review and pull up a report. The great thing about and I think most practices use QuickBooks, at least that's what I've seen. But on the QuickBooks report, it doesn't matter if you're using a desktop or QuickBooks online, but there's an option to how you want to view your report, in the option. What I'm referring to is how do you want to display your columns and you can select by month. You don't have to run 10 different P&L's. You want one P&L,

Jesse Arnoldson:
Right, right.

Jay Holmes:
For the past 12 months. And then you just select the month column, by month column and you can see that and then see what pops out at you. Why are things zero where things larger and start asking those questions.

Jesse Arnoldson:
Awesome. Jay, thank you. And for our listeners, just to recap, know this can be a pretty intimidating process, but there's a simple place to start like Jay said. Just start looking at your financial statements, pull the reports, try and get them in a way that makes sense and start asking questions. The second step would probably be to go to your accountant and start working on that balance sheet Excel spreadsheet to be able to have a workbook that you go through once a month just to make sure everything's in place because you can't be making the kinds of decisions on what you pay, the doctors, hiring new staff, purchasing new equipment. If you don't know that you have 52 cards in your deck to start the month, this is the process that helps you make sure you know where you're at before you start making big financial decisions. Jay, thanks for being on here. Thanks for going through this with us.

Jay Holmes:
Hey Jesse, thank you. Man, thanks for providing us the soapbox for me to tell my story on. So appreciate it.

Jesse Arnoldson:
Absolutely. And listeners, before you get too far, make sure you hit the subscribe button so you can stay up to date on all the latest MedMan content. We're here twice a week pushing out the best ideas from the best people on how to run your practice and get it to level off. We'll see you next time.

Jay Holmes:
Thanks for tuning in to the MedMan Podcast, we hope you enjoyed today's featured guest.

Jesse Arnoldson:
For the show notes, transcripts, resources and everything else MedMan does to help you level up, be sure to visit us at MedMan.com

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