Financial Pearls for Young Ophthalmologists and Doctors

By Rob Melendez, MD, MBA

What are assets?
What are liabilities?
What is equity?

Do you remember the Glycolysis pathway? I know you are trying to forget it, but let’s review a simple way of thinking about it. We have to spend ATP to make ATP. It has over 10 steps where you start with glucose and end with Pyruvate to generate 4 molecules of ATP (energy) and 2 molecules of NADH. The glycolysis pathway requires 2 ATP to generate 4 ATP. Therefore, we generate 2 net ATP with this pathway. We have to spend ATP to make ATP. In the business world, they would a say, we have to spend money to make money. Now we are ready to discuss a simple financial equation.
Assets = Liabilities + Equity

Assets = Glucose
Liabilities = 2 ATP
Equity = 2 Net ATP and 2 NADH (and 2 Pyruvate)

Let’s take a closer look at Assets, i.e. what we have or own. In our biochemistry lesson, our asset (i.e., what we have) is glucose. In the business world assets are items a company owns that has value. Assets can be sold or be used to create a product and/or service, which in turn, can also be sold. Assets are classified as either current or non-current. Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets include cash and cash equivalents, accounts receivable and inventory. Non-current assets are assets that are not turned into cash easily, are expected to be turned into cash within a year and/or have a life span of more than a year. They are referred to as tangible assets such as machinery, computers, buildings and land. Non-current assts can also be intangible assets, such as goodwill, patents or copyrights.

Liabilities: In our example, the liability was the energy (2 ATPs) needed to generate 4 ATP and 2 NADH. It always costs something to make something. On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to the outside parties. Like assets, they can be both current and long-term. Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet. Current liabilities are the company’s liabilities, which will come due, or must be paid, within one year.

Equity: a.k.a. Shareholders’ Equity

This also referred to as capital and net worth. You may have heard this question, how much capital (equity) do you have? Shareholders’ equity is the initial amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet into the shareholder’s equity account. This account represents a company’s total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders’ equity on the other side.

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Example Balance Sheet