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Why Understanding Cash Flow is Essential to Your Dental Practice

Posted by Goldin Peiser & Peiser on May 12, 2016 4:04:09 PM

May 2016

By: Erick Cutler

In the past I’ve covered dental financial statements, but now I want to address the topic of why exactly you should care about a specific financial concept in your dental practice, and that’s cash flow.

Most simply, if you care about any of these three areas listed below then cash flow should be top of mind for you on an ongoing basis.

  • Your Practice
  • Your Profits
  • Your Peace of Mind

How Cash Flow Impacts Your Practice

While it’s easy to look at cash flow as just money flowing in and out of your practice, it really is deeper than that. Cash flow is control, and cash flow is choice.

The connection isn’t immediate or obvious, but over the long term, cash flow impacts your dental practice in multiple, fundamental ways.

  • Staffing: Chances are, if you’ve ever had to make a staffing decision, the question of money came up. At the time, you probably didn’t think that deciding whether or not to give Barbara a raise was dependent on your cash flows over the last year, but regardless, it was. The same goes for the number of people and clinicians you keep on board, their benefits, even the educational and experience levels of staff members you can afford.
  • Equipment and Technology: Dental patients are demanding more and more advanced methods of treatment, and of course, those cost money. Whether you’re making technology and equipment purchases out right or using debt, your ability to do so in a prudent financial way will depend heavily on the health of your cash flows.
  • Outlook: If we’re being honest, day-to-day impact of cash flow accumulates, meaning that the way you and your staff feel about and make decisions around the future of your practice will be impacted on a regular basis by cash flows. How you view the future of your practice will be a factor in not only your decisions, but also in your staff’s and your ability to attract productive dental talent.

Why Cash Flow Matters to Your Profits

It’s pretty obvious that cash flow has a big impact on your profits, but it’s easy to miss exactly how much of an impact it can have.

Let’s start with a quick review of what cash flow really is. Most simply, it’s the money your practice generates minus what it costs to keep it running. This means that if your resulting cash flows are too low, or even negative, your practice’s profits are in jeopardy.

It’s much deeper than that, though, and is something that should be analyzed on a regular basis. When you hear talk of “cash flow analysis” it’s simply a measure of your practice’s financial health and your general ability to meet your business and personal obligations. Since profitability is important to potential buyers, issues in this area can put an extra dent in the valuation of your practice — something you don’t want to see happen, especially if you’re considering retirement or selling your practice within the next few years.

What Cash Flow Means to Your Peace of Mind

Everything we’ve discussed so far around cash flow will eventually lead back to how much peace of mind you feel around your career as a dentist.

For example, your ability to purchase or start a practice can be heavily impacted by the amount of your student loans, which are frequently used in the calculation of cash outflows when determining how much a bank is willing to loan you. (Dental Entrepreneur has a great illustration here.)

Slow or low cash flows can also mark some of the most difficult periods of your dental career. As expensive technology becomes a requirement for most practices and regulations continue to shift, you can be certain that low cash flows will be an issue for you at some point in your career. They can be a result of multiple factors including poor record keeping, tax problems, or even local competition, but thankfully, there are a few things you can do to adjust.

It's honestly difficult to name an issue your practice faces that doesn’t in some way tie back to cash flows. Make it a habit to prioritize healthy cash flows, and you’re almost certain to see the benefits multiply across your entire practice.

Contact the dental accountants at GPP to help with any cash flow issues or to evaluate the overall financial health of your practice.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Dental