Why is the Statement of Cash Flows (SOCF), which is crucial to evaluating the health of a dental practice, seldom used? The SOCF is one of the three financial statements the dentist (or any business owner) should be reviewing, but tends to skip over. The other two statements are the Balance Sheet and the Income Statement (Profit and Loss). Why not rely on the "bottom line" of the Income Statement? Can't this show the health of a dental practice? The "bottom line" or net income on the Income statement is usually one of the first things the dental practitioner will look at. However, this is not the full picture. The income statement is on the accrual basis, not cash basis. This means revenue earned or expenses incurred may not have been actually collected or paid. It does not show actual cash flowing thru the business.
So what does the SOCF show the dental practitioner? Some investors believe that "cash is king". The SOCF identifies cash flowing in and out of the business. If your practice is consistently generating more cash than it is using, it will be in a better position to pay off debt, invest or expand. There are three areas of the business that changes in cash are analyzed. They are the Operating Activities, the Financing Activities and the Investing Activities. Here is breaking them down further:
OPERATING ACTIVITIES: This indicates cash flow changes from the following Income Statement Accounts:
A/R (accounts recievable)
A/P (accounts payable)
Loans of less than one year
FINANCING ACTIVITIES: This indicates cash flow changes from the following Balance Sheet Accounts:
Notes payable in excess of one year (long term)
Additonal paid in capital
Other capital accounts
INVESTING ACTIVITIES: This indicates cash flow changes from the following Balance Sheet Accounts:
Fixed Assets including buildings, equipment, autos, land, etc..
How does the business owner/dental practitioner interpret the information from these reports? There is a general rule of thumb that will help the dental practitioner evaluate the SOCF.
1. When an asset increases, such as buying a computer or equipment, cash flow decreases. Money was paid for the assets and taken away from the cash flow. The inverse is also true. If you sell an asset, that asset will decrease or go away, but your cash flow will increase.
2. When a liability or equity account increases, cash flow increases. So if an owner puts money into the company, that will increase equity. This also increases the cash available. The same happens with a loan. The liability will increase, and so will the available cash. As with the first point, the inverse is true also. Paying off a loan or having an owner distribution will decrease available cash.
Now the dental practitioner can know the basics and should be able to discuss the SOCF with his/her "Great Bookkeeper" who will generate these reports. Bookkeeping Aesthetics looks forward to hearing from you!