Most veterinary practice managers and leaders are familiar with the profit and loss (P&L) statement. Understanding the flow of money in and out is critical to day-to-day operations. The veterinary practice balance sheet is equally important, but many leaders overlook this misunderstood report.
The balance sheet is the only financial report that tells you where your practice stands right now, in the current moment. Whereas the P&L tells a story, the veterinary practice balance sheet tells you whether that story makes sense.
The VetBooks team can manage your P&L (i.e., income statement) and veterinary practice balance sheet to help you plan for the future. Here’s how the balance sheet can help power better decision-making.
How is the balance sheet different?
Veterinary practices are dynamic businesses with cash flowing in and out daily. The P&L statement tracks earnings, spending, and profits, but it doesn’t provide a complete financial picture.
The balance sheet fills in the missing pieces by answering questions like:
- How much cash does the practice have?
- How much does the practice owe on loans, credit cards, taxes, or vendor accounts?
- What are the practice’s assets worth, including inventory and equipment?
The formula behind the veterinary practice balance sheet is simple: Assets = Liabilities + Equity. Everything you own (i.e., assets) was purchased with either liabilities (e.g., loans) or equity (i.e., profit). Essentially, your balance sheet tells you what you own, what you owe, and what’s left over.
What does the balance sheet reveal?
When maintained properly, the veterinary practice balance sheet offers critical insights. Here are three questions it can help you answer.
1. Is my practice financially stable?
A well-organized balance sheet reveals whether your practice is building equity or accumulating debt. Your liabilities could outweigh your assets despite a healthy-looking P&L. Although equity in a business isn’t necessarily liquid, it reflects the business’s sustainability.
2. Can my practice cover short-term obligations?
The current ratio helps determine whether you have enough resources to cover upcoming expenses. To calculate this ratio, divide your current assets by your current liabilities. A ratio between 1.5 and 2.0 is generally healthy, but a ratio below 1.0 means you owe more than you have.
3. Is my practice in a position to grow?
Your debt-to-equity ratio is another key indicator of financial health that compares how much your practice is financed by debt versus earnings. A ratio under 1.0 means you have more equity than debt and plenty of borrowing capacity. A moderate ratio of 1.0 to 2.0 is a healthy range, while a ratio over 2.0 could mean you’re overextended and prevent you from borrowing in the future.
Common balance sheet mistakes in veterinary practices
Errors on the balance sheet are common, and they can skew numbers and mislead decision-making. Here are a few frequent issues:
- Miscategorizing large purchases — If you buy a new piece of equipment and log the full amount as an expense on your P&L instead of listing it as an asset, your profitability artificially appears lower.
Incorrectly recording loan activity — Recording loan payments as expenses without addressing the loan balance or interest versus principal on the balance sheet makes it impossible to track debt.
- Not using the balance sheet — Failing to update the balance sheet regularly during the veterinary bookkeeping process makes it impossible to see the bigger picture.
How to use the balance sheet
Here’s how to start using your veterinary practice balance sheet to benefit your practice:
- Record everything — Include financial activity beyond income and expenses, such as loan payments, owner contributions, and equipment purchases.
- Use the AAHA/VMG Chart of Accounts — The Chart of Accounts is a detailed template for financial tracking. It includes many categories of income and expenses and a section for balance sheet activity.
- Use the balance sheet and income statement together — If your P&L statement shows a profit but your cash is low, your balance sheet will help explain why. Update both reports monthly to get the whole story.
Better data for better decisions
The balance sheet can feel intimidating, complex, and difficult to understand. However, focusing only on the P&L provides an incomplete picture of your veterinary accounting and financial health. A well-maintained balance sheet shows where you stand, helps you spot problems, and supports smarter decisions about growth, staffing, and spending.
While the AAHA/VMG Chart of Accounts balance sheet is an excellent tool for financial management, it can also be intensive and complex. The veterinary bookkeepers at VetBooks can help you navigate your finances and the veterinary practice balance sheet. Contact us to learn more about our services and how accurate books can influence the future of your business.
Check out this webinar presented by Veterinary Growth Partners (VGP) and VetBooks for an in-depth discussion on how to understand and use the balance sheet.