Profitability and viability are not always synonymous. You will discover when learning how to become an accountant that an organization can be profitable every year, but still go bankrupt. How is this possible? Most frequently it is due to the result of rapid growth and poor financial planning. Consider a privately held medical supplies company. Lets look at a theoretical example with a company called Medical Supplies Expanded, whose sales are so good that it constantly needs to expand its inventory on hand. When a company is constantly expanding it requires cash payments to manufacturers well in advance of ultimate cash receipts from customers. So…..assume that Medical Supplies Expanded starts the year with $40,000 in cash, $80,000 of receivables, and $10,000 units of inventory. Receivables are the amounts their customers owe for goods and services that they bought but which have not been paid for yet. It’s inventory units (the medical supply items) are sold for $10 each and they have a cost of $8 yielding a profit of $2 on each unit sold. During January, it collects all of its receivables from the beginning of the year (no bad debts!) thus increasing available cash to $120,000 available, it spends $96,000 on replacement and expansion of inventory (12,000 units acquired at $8 each). No cash is collected yet for sales made in January. This leaves a January month-end cash balance of $24,000.
Everyone at Medical Supplies Expanded is overjoyed because they are making money on each unit sold plus they are collecting 100 percent of their sales on a timely basis. There appears to be unlimited growth potential for increasing sales and profits at Medical Supplies Expanded. This is an ideal situation, and it doesn’t always occur this way. That is why it is important to have a good health care accountant to assess the financial needs of any health care organization.