Format of the Profit and Loss Statement for Service Related Businesses

Medical Practice Example

Service related businesses require a different format than the traditional profit and loss statement AKA the income statement.  The traditional profit and loss focuses on sales of products and a corresponding cost of goods sold section to help the reader evaluate the gross margin.  But in service, the owner needs a profit and loss statement formatted to key in on overall productivity and costs of that productivity.

To get results that are usable to the reader, the profit and loss statement for a service related business should provide the following information:

 ·  Revenues related to professional services rendered
·   Revenues related to support staff
·   Revenues related to non-service items
·   Direct costs of professional services
·   Direct costs of support staff
·   Other direct costs
·   Fixed and Variable Personnel Related Costs
·   Overhead
·   Profit Before Taxes

A properly formatted profit and loss for a service related business helps the reader determine how much his professional staff contributes to the overall value of the business.  In addition, it allows the reader to relate costs associated with the revenue generated by that respective cost.  This format works well for the following service related industries:

·  Medical Offices
·  Nursing and Geriatric Care
·  Legal and Accounting
·  Consulting Firms
·  Technology Services
·  Cleaning/Maid Operations
·  Hair Salons/Barbers/Personal Hygiene Operations
·  Education Services
·  Engineering/Surveying/Architecture
·  Mental Health/Social Services/Child Care/Adult Care

The following sections describe each of the above elements and illustrate the profit and loss statement to that point in format:

Professional Services Rendered (Revenue)

In general, the professional services rendered are those billings associated with the professional staff.  Simply put, any licensed or key individual in your organization is considered the professional.  In most service related operations, a separate software used to track time and billings calculates the total revenue earned by professional and support staff.  Even average time billing software can break out the information into these two groups.  You can even subdivide the professional services rendered into subgroups for each revenue line.

Support Staff Billings

It is not uncommon for support staff to earn revenue or generate billings for the service related company.  The key is to identify and separate the staff into the two fundamental groups of either professional or support.  Support staff includes office personnel, assistants, researchers and/or aids.  Examples include non-licensed nursing staff, non-degreed assistants, employees in training; field workers and general staff members.  Do not include your administrative staff in this section as they track the information for the organization as a whole and do not provide any direct or indirect services to clients.

Non-Service Fees

Any item not requiring human labor to execute and is billed to the client is included here.  Examples include:

·  Copying
·  Fax
·  Travel Costs
·  Pass-Through Costs (room rentals, court fees, technology fees) 

For the purpose of this article, the writer is using a medical practice (family practice) as the example to illustrate the proper format for the profit and loss statement.  So the revenue section of the profit and loss will look like this:

    Sunville Medical Practice
   Profit and Loss Statement
Period Ending October 31, 2012 

Medical Billings:
      Medical Practitioners                                                           $Z,ZZZ,ZZZ
      Medical Support (LPN, Physical Therapist)                             ZZZ,ZZZ
     Sub-Total Medical Billings                                                  $Z,ZZZ,ZZZ

Non-Medical Fees:
         Weight Loss/Diabetic Program Subscriptions        ZZ,ZZZ
          Copy/Fax/Report Fees                                                 ZZZ
          Sub-Total Non-Service Fees                                                    ZZ,ZZZ
Total All Billings/Fees                                                             $Z,ZZZ,ZZZ

Note how the revenue section is subdivided into the two major revenue generating departments, medical and non-medical.  Each revenue generating department has sub-groups to clearly identify who earned fees for the service related operation.

A reader of this format wants to be able to separate the professional fees and its associated costs from the non-medical related revenue and its corresponding costs.  So the next major section is referred to as the Costs of Services Rendered.  This section is divided into two subgroups, the first are those costs directly related to the billings and fees earned.  The second section includes the indirect costs associated with earning the revenues.  The sections below describe and an illustration of the formatted report is provided to aid the reader in understanding.

Direct Costs of Services Rendered

This section of the report includes those salaries and wages paid to the professional and support staff to provide the service to the patients.  In addition, a line of information associated with the non-medical fees is included.  Here any direct costs, such as materials, supplies, etc. are identified to aid the reader of the report.  The following illustrates the direct costs section.

Direct Cost of Professional Services:
       Professional Provider Salaries                                      $ZZZ,ZZZ
       Support Staff Salaries & Wages                                      ZZZ,ZZZ
       Sub-Total Direct Labor                                                                       ZZZ,ZZZ
       Medical Supplies (Pharmaceutical, kits, bandages)      ZZ,ZZZ
       Weight Loss/Diabetic Program Supplies                       ZZ,ZZZ
       Sub-Total Supplies                                                                              ZZZ,ZZZ
Total All Direct Costs of Services Rendered                                      $ZZZ,ZZZ

Review and compare the direct costs line for line to the revenue section.  There is an easy to identify process of comparing a line of revenue to the actual direct costs of that revenue.  The only exception is the medicinal supplies cost.  Here the reader has to infer that this cost is a function of total medical billings as the exemplified information of pharmaceutical, kits and bandages relate to medical billings and not the non-service fees function of revenue.

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The second section of the total costs of services rendered is indirect costs.  Indirect costs are those costs incurred to provide services and non-services to the patients but cannot be directly identified to any individual or are fixed in nature.  Examples include payroll taxes, health and benefits for the staff, training, licensing and laboratory fees.  The section below illustrates the indirect costs section of the costs of services rendered:

Indirect Cost of Professional Services:

     Payroll Taxes                                                        $ZZ,ZZZ
      Medical Billing                                                      ZZ,ZZZ
      Professional Liability Insurance                            ZZ,ZZZ
      Gen Liability/Workmen’s Comp                           ZZ,ZZZ
      Lab/Outside Services (Temp Staff)                       ZZ,ZZZ
      Payroll Benefits                                                     ZZ,ZZZ
      Retirement Matching Contributions                     ZZ,ZZZ
      Training/Accreditation/Compliance                        Z,ZZZ
      Medical Waste Removal                                          Z,ZZZ
      Total Indirect Cost of Professional Services                  $ZZZ,ZZZ

So let’s now take a look at the formatted profit and loss statement for a service related business at this point.  Please see below:

    Sunville Medical Practice
   Profit and Loss Statement
Period Ending October 31, 2012

Medical Billings:
       Medical Practitioners                                                              $Z,ZZZ,ZZZ
       Medical Support (LPN, Physical Therapist)                                ZZZ,ZZZ
       Sub-Total Medical Billings                                                     $Z,ZZZ,ZZZ

Non-Medical Fees:
        Weight Loss/Diabetic Program Subscriptions              ZZ,ZZZ
        Copy/Fax/Report Fees                                                        ZZZ
        Sub-Total Non-Service Fees                                                           ZZ,ZZZ
Total All Billings/Fees                                                                 $Z,ZZZ,ZZZ

Direct Cost of Professional Services:
.        Professional Provider Salaries                                    ZZZ,ZZZ
.        Support Staff Salaries & Wages                                 ZZZ,ZZZ
.        Sub-Total Direct Labor                                                                 ZZZ,ZZZ
.        Medical Supplies (Pharmaceutical, kits, bandages)   ZZ,ZZZ
.        Weight Loss/Diabetic Program Supplies                    ZZ,ZZZ
.        Sub-Total Supplies                                                                         ZZZ,ZZZ
Total All Direct Costs of Services Rendered                                      ZZZ,ZZZ
Indirect Cost of Professional Services:
.       Payroll Taxes                                                      ZZZ,ZZZ
.       Medical Billing                                                     ZZ,ZZZ
.       Professional Liability Insurance                           ZZ,ZZZ
.       Gen Liability/Workmen’s Comp                          ZZ,ZZZ
.       Lab/Outside Services (Temp Staff)                      ZZ,ZZZ
.       Payroll Benefits                                                    ZZ,ZZZ
.       Retirement Matching Contributions                    ZZ,ZZZ
.      Training/Accreditation/Compliance                        Z,ZZZ
.       Medical Waste Removal                                         Z,ZZZ
Total Indirect Cost of Professional Services                                   ZZZ,ZZZ
Gross Profit                                                                                      $ZZZ,ZZZ

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From this point, overhead costs are subtracted to calculate the net profit before taxes.  Overhead costs include several groupings.  They are as follows:

·   Occupancy – rent, utilities, cam fees, repairs and maintenance to the property
·   Communications – internet, phone system, cell phones and pagers
·   Office – office supplies, copier costs, charts, cleaning, reception area magazines, etc.
·   Marketing – advertising, marketing, information pamphlets, website cost
·   Professional Fees – legal, accounting, outside consultants
·   Taxes & Licenses – local revenue taxes, state incorporation fees, state licensure fees, personal property taxes
·   Other – any other costs not included above
·   Depreciation and Amortization – equipment depreciation and start-up amortization, goodwill amortization

With this information, the final formatted profit and loss statement will look like this:
                                           Sunville Medical Practice
                                           Profit and Loss Statement
                                      Period Ending October 31, 2012

Medical Billings:
        Medical Practitioners                                                             $Z,ZZZ,ZZZ
        Medical Support (LPN, Physical Therapist)                              ZZZ,ZZZ
        Sub-Total Medical Billings                                                  $Z,ZZZ,ZZZ

Non-Medical Fees:
        Weight Loss/Diabetic Program Subscriptions           ZZ,ZZZ
         Copy/Fax/Report Fees                                                    ZZZ
         Sub-Total Non-Service Fees                                                        ZZ,ZZZ
Total All Billings/Fees                                                               $Z,ZZZ,ZZZ

Direct Cost of Professional Services:
         Professional Provider Salaries                            ZZZ,ZZZ
         Support Staff Salaries & Wages                         ZZZ,ZZZ
         Sub-Total Direct Labor                                                               ZZZ,ZZZ
         Medical Supplies                                                    ZZ,ZZZ
         Weight Loss/Diabetic Program Supplies               ZZ,ZZZ
         Sub-Total Supplies                                                                       ZZZ,ZZZ
Total All Direct Costs of Services Rendered                                    ZZZ,ZZZ

Indirect Cost of Professional Services:
          Payroll Taxes                                                      ZZZ,ZZZ
          Medical Billing                                                     ZZ,ZZZ
          Professional Liability Insurance                           ZZ,ZZZ
          Gen Liability/Workmen’s Comp Ins                    ZZ,ZZZ
          Lab/Outside Services (Temp Staff)                     ZZ,ZZZ
          Payroll Benefits                                                   ZZ,ZZZ
          Retirement Matching Contributions                    ZZ,ZZZ
          Training/Accreditation/Compliance                      Z,ZZZ
           Medical Waste Removal                                       Z,ZZZ
Total Indirect Cost of Professional Services                                      ZZZ,ZZZ
Gross Profit                                                                                          ZZZ,ZZZ

General and Administrative (Overhead)
           Occupancy                                                     ZZ,ZZZ
           Communications                                            ZZ,ZZZ
           Office                                                             ZZ,ZZZ
           Marketing & Advertising                                 Z,ZZZ
           Professional Fees                                              Z,ZZZ
           Taxes & Licenses                                             Z,ZZZ
           Other                                                                   ZZZ
           Depreciation & Amortization                           Z,ZZZ
Total G&A (Overhead)                                                                      ZZZ,ZZZ
NET PROFIT                                                                                      $ZZ,ZZZ

From the above report the reader can evaluate the overall performance of the service related operation.  The reader of this report can identify direct cost to the correlating revenue.  Indirect costs can be evaluated against the overall revenue.  Revenue is divided between medical and non-medical billings.  Overhead is summarized for easy reading and understanding.  The above example should be slightly modified to suit your service related company.  It can be further refined to correlate with the business entity type too (partnership, corporation etc.).  By having an easy to read and understandable formatted profit and loss, the reader of the report can quickly pinpoint any issues that may exist in the business operation.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.  If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer. 

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About David J Hoare 427 Articles
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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