What Does "Clean Books" Really Mean?

Many practice owners hire bookkeepers or CPAs to develop their financial statements.  Many use these services for monthly tracking, annual tax reporting, or both.  When considering selling a practice or agency, just keeping the books is not enough.  The books need to be “clean.”  What are “clean” books?  At first glance, one might think it means keeping your books orderly and up to date.  Well, that’s only a small part of what clean books means to a prospective buyer, investor, or banker.  Clean books means not only keeping orderly books, but it also means (i) keeping a detailed history of financial performance, (ii) describing the characteristics of the income, expenses, assets, and liabilities, (iii) explaining transactions that are not in the ordinary course of business, and much more.  We list below key financial documents practice and agency owners need to produce when considering selling their operations:

1.     Business Federal Tax Filings. Complete federal tax returns (including all schedules and amendments) for the past 3 fiscal years.  Include filings such as Form 1120, 1120-S, or 1065). Ensure that balance sheet information is completed for all years that show gross receipts or total assets exceed $250,000.

2.     Current Financial Statements.  Current month and year-to-date profit and loss statements.

3.     Balance Sheet within the past 30 to 90 days.

4.     Internal profit and loss statements for the past 3 years. Quickbooks Online is the preferred accounting application.  Avoid using Microsoft Excel spreadsheets for tracking finances.

5.     Historical internal balance sheets for the past 3 years

6.     Business Debt Schedule.  A detailed list of all existing business loans, lines of credit, monthly payments, interest rates, and remaining balances.

7.     Business Bank Statements. Past 24 monthly bank business transactions.

8.     Accounts Receivable Aging Report.  Accounts receivable report by client including amount, payment terms, due date, and days outstanding. Make notes explaining any doubtful accounts receivable.

9.     Accounts Payable Report by payee including amount, payment terms, due date, and days outstanding. Make notes explaining any disbuted invoices.

10.  Concentration of Revenue by Payor.  Table listing gross receipts by Top Payor by year for the past 3 years. List amount and percentage of gross receipts for each Top Payor.  Top Payor means any payor that contributed more than 5% of the practices or agencies gross billings.

11.  Concentration of Revenue by Services. Table listing gross receipts by Top CPT, Top HCPCS, or both, by year for the past 3 years. List amount and percentage of gross receipts for each Top CPT and Top HCPCS.  Top CPT or Top HCPCS means any CPT or HCPCS that contributed more than 5% of the practices or agencies gross billings.

12.  Net Collections Report by Payor.  Table listing gross receipts, discounts, and net collections by Top Payor by year for the past 3 years. List net collections and percentage of total net collections for each Top Payor. 

13.  Net Collections Report by Services. Table listing gross receipts, discounts, and net collections by Top CPT, Top HCPCS, or both, by year for the past 3 years. List net collections and percentage of total net collections for each Top CPT and Top HCPCS.

Management Discussion

Discuss extraordinary items in the Profit & Loss Statement.  List any income or expenses that were not generated in the ordinary course of the practice or agency.  For example:

a.     Gain or loss on sale of equipment

b.     Income from government grants or subsidies

c.     Investment income

d.     Gain or loss from legal settlements

e.     Allowance for doubtful accounts

f.      Asset write-offs

g.     Extraordinary legal fees

h.     Gain or loss on the sale of real estate

i.       One-time regulatory fees, assessments, or fines

j.       Unamortized start-up costs for training or software integration

k.     Expenses deducted for large capital investments (e.g., in-office milling and digital design units) and replacement of practice-wide hand tools and system (e.g., operational delivery units or complete operatory chairs).

l.       Emergency property repairs for unplanned remediation (e.g., major damage due to water, fire, or structure failure not covered by insurance deductible caps).

a.     Expenses due to cybersecurity breaches and ransomware recovery (e.g., forensic IT investigation, patient notification mailing, and data restoration expenses)

Clean financial statements include discussions that help buyers, investors, and bankers better understand the operation.  Best practices discussions include:

a.     Balance Sheet Transactions.  For the past 3 years, list and explain all owner or partner material transactions (e.g., loans, loan write-offs, equity injections, owners’ draws, partner payouts)

b.     Bank Statements – Extraordinary transactions.  Cite and comment on each material transaction in the bank statements for the past 2 years that were not directly related the practice or agency (e.g., personal money received into the business account then subsequently withdrawn).