Cash Flow is the movement of money in and out of a business. Net Profit is well, your profits. So it stands to reason that having a healthy Cash Flow would equal a healthy Net Profit, right? Not always! So what can dwindle away your Cash Flow while you are still showing a Net Profit?  Here is a quick lesson on how to start looking at Cash Flow the right way in your practice.

What if you overspent in December with a holiday party and bonuses for your team?  What if you paid an extra month’s rent or bought supplies trying to reduce the Net Profit and taxes you will owe in December?  What if you started with a low amount of cash in the bank beginning January 1?  With an anticipated reduction in REVENUE (Income) for the first few months of the New Year due to higher deductible plans, if you did NOT plan to reduce your spending to adjust to the dips in Revenue, you are likely to experience a CASH FLOW slowdown that you will start to feel in March and April!

Learning to understand your “Financial Story”: what the history is showing you about how the money is moving in and out of your practice”, will help you to identify a Cash Flow problem in the future.  For example, understanding how your debt(s) and owner’s distributions affect your Cash Flow?  You may be watching the Profit and Loss Sheet but not paying much attention to the Balance Sheet, where cash is posted on a monthly basis (i.e. payment on loans).  On top of it all, how well do you understand your Profit Margins and how they work with Cash Flow?  It sounds great to say we are caring for 500 new patients. Or we have so much work that we have a team of 20 employees to manage the work load.  What you may not know “you don’t know”, is that your payroll expense is too high against the “slowdown” in REVENUE for the beginning of the year. An important metric to understand on your Profit and Loss Sheet is: what is the Net Profit percentage to Revenue?   Revenues less Expenses equals Net Profit.  One indicator for good Cash Flow is to drop 10% of your Revenue to the bottom line (Net Profit). This can help to equal better cash flow.

How do you understand the movement of money into and out of your business (Cash Flow)?  How do you explain why you are having trouble making payroll when your Profit and Loss is showing a small Net Profit?  Where is the money going?  Why is there stress and uncertainty as to whether you are going to make payroll or not if there will be enough money in the bank account this week or month?  Why is there less money each month when your revenues are increasing? Cash Flow is not about Net Profit or Net Loss.  It’s about the movement of money on your Profit & Loss Sheet AND on your Balance Sheet.  Once you understand the movement of money between the Profit & Loss Sheet and the Balance Sheet, it gives you the ability to forecast into the future.

The important part of this lesson is the concept of Cash Outlay per month against Projected Revenues.  Cash Outlay is not the same as total expenses on your Profit & Loss Sheet. Cash Outlay has to do with how much cash is going out on a monthly basis. That includes your expenses AND your principal loan payments, credit card payments, lines of credit payments, and owner’s distributions and dividend payments.  All these things that are posted to your Balance Sheet are part of the Cash Outlay.  If you could add up all the monthly payments that posted to your Balance Sheet and then deduct them from your Net Profit, you will see that you “in theory” could be running at a Net LOSS.

There are many challenges faced in the business world and understanding cash flow is one of the most important to master. By identifying your average Cash Outlay each month against projected revenues several months into the future, you can see whether or not your business model is sustainable or not. Understanding the movement of money and how to accurately project Cash Outlay against projected revenues will definitely give you peace of mind at the end of the day!

Debra Robinson works with doctors to help deliver a comprehensive, forward-looking view of their finances offering an extra set of eyes to look for areas that may cause inadequate cash flow into the practice.  Different than a CPA’s perspective.