A practice’s assets are everything owned by the practice, including property, medical and technological equipment, furniture, and cash on hand (eg in bank accounts).
A practice’s liabilities are all of their financial obligations and responsibilities. These could include:
- credit card debts
- tax payable
- superannuation payable
- outstanding debts (eg to suppliers and utility providers)
- interest payable to lenders, credit cards, ATO, suppliers
- accrued employee entitlements such as long service leave, paid parental leave, and annual leave
- professional fees (eg legal and accounting)
- ongoing income tax and superannuation payments
- monies still owed to previous owners
- financial arrangements with existing owners
- other financial arrangements (eg with the owner of leased premises).
If you are considering buying into a practice, remember that you’re also buying into its assets and its liabilities, so seek professional advice to identify and assess all of the practice’s assets and liabilities, as well as income and expenses.
Making financial decisions
When you are a business owner, every financial decision needs to be based on not just the business’s projected income but also its short-term and long-term liabilities.
Financial statements such as balance sheets and cash flow statements can help you assess the financial health of your business.
A balance sheet lists your business's assets and liabilities and identifies the business’s net worth. The net worth is:
- the total value of assets minus the total value of liabilities.
Cash flow statements
A cash flow statement summarises the amount of cash and cash equivalents entering and leaving a business. It can help you identify:
- the amount of money you need to operate on a day-to-day basis (known as working capital)
- how quickly you can pay current debts (known as business liquidity).
The cash flow statement provides a good indication of the financial health of your business.