Developing a Simple Cash Flow Statement for Private Practice [2020]

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Understanding a simple cash flow statement for your Private Practice

You’ve heard the sane, cash is King. 

Of course it is, but understanding how we look at cash flow is essential to making practical business decisions. We can sometimes make some pretty bad decisions because cashflow can also be misleading in a healthcare practice.

I’m here today to show you the ins the outs and how to break down your cash flow and ensuring you don’t fall into those hidden traps I alluded to earlier.

So let’s start with understanding what statement you utilize to measure cashflow.

Traditionally, you will use a profit and loss statement on a cash basis to calculate cash flow. Some practices will generate a simple cash flow statement, which is a financial statement that summarizes the amount of cash and cash equivalent, entering and leaving a company and a given period of time. 

Cash Flow Analysis

The cash flow statement measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. 

Traditionally, a cash flow statement is challenging to show from a positive perspective for private healthcare practices, unless you were either at scale, meaning you reached optimum growth and you’ve got the numbers behind you from a revenue perspective. Or you have a more considerable profit margin than most. 

Now I typically see 1 to 20% in terms of our margin in healthcare. 

Traditionally, when you file your taxes, they look at everything through the lens of a profit and loss statement on a cash basis, accounting structure. Cash received versus cash paid out for a certain period of time. 

However, from a strategic standpoint, I prefer an accrual basis accounting system, so I want you to be aware.

An accrual-basis accounting system

I like an accrual basis accounting system because I find cash flow can be misleading in healthcare. 

An example of this is that your high cash flow first and second quarters of 2020 might be misleading due to collections related to claims from the end of 2019 to the beginning of 2020.

One of my practices had its best January and February ever in 2020.  Even their best March from a productivity level. April, May, and June were strong as well. And we received our PPP money. So actually, our third quarter even looked decent.

It’s not until the fourth quarter until we really feel the pandemic. 

Another thing to keep in mind related to cash flow is that your cash flow typically lags productivity. So you can have a high producing month in which your cash flow is awful because it might take 30, 60, 90 days before that productivity pays off.

Meanwhile, if you’re like me where you pay variable costs, we pay for a lot during those higher productivity months in most circumstances. And so there’s a lag in that cash flow. So it’s essential to keep in mind the lens of what we look at your cash flow

three strategies for optimizing that cash flow statement.

  • I recommend at least six months of cash flow on hand. 

  • I want you to align your productivity by measuring cash flow regularly.

  • I want you to do financial modeling for the next 12 months.

Understanding your productivity, measuring your cash flow, and your profitability are all important things. If this is something you struggle with, I want you to sign up for a free 30-minute complimentary strategy session. 

Conclusion

My name is Brandon Segal, and I’m the president of Wellness Works Management Partners. I spend my day in and day out coaching, consulting, and partnering with private practices just like yours. I’m on a mission to change the world one private practice at a time.

Let's unlock your bottom line, your cash flow, your metrics, and your accrual basis strategy so you're ready to take advantage of 2021.

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