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9 May, 2024

Cash Flow vs. Profit: Maximizing Your Dental Practice Success

Introduction

If you’re running a dental practice, you know how important it is to keep an eye on these two critical metrics: profit and cash flow. While both are pivotal to the operational health and sustainability of your dental practice, understanding the difference between them is vital for informed financial decision-making and strategic planning. This blog post explains the nuances of profit versus cash flow, and explains how you can create a balanced approach to both that supports your long-term success.

 

The Purpose of Profit in Your Dental Practice

At its core, profit represents the financial surplus your practice is left with after all operational expenses have been paid. These expenses include staff wages, the procurement of dental supplies, office lease payments, equipment upkeep, and more. Essentially, profit serves as a barometer of your business model’s effectiveness, highlighting the financial health of your dental practice over a specific period (i.e. 1 month, 3 months, 12 months and beyond).

However, it’s important to acknowledge that a healthy profit margin, though indicative of business success, doesn’t provide a holistic view of your financial performance, particularly regarding liquidity, income taxes and debt obligations.

 

Cash Flow: The Lifeblood of Your Dental Practice

In contrast to profit, cash flow represents the actual monetary transactions flowing in and out of your business (when they’re actually received and paid out).

Cash inflows include revenues from patient payments and insurance settlements, while cash outflows include operating expenses, debt repayments, and tax liabilities. Cash flow is the lifeblood of your dental practice, vital for managing day-to-day operations and financial solvency.

A misunderstanding of profit and cash flow can present an unsettling situation where, despite a profit on the books, your practice may face challenges in meeting its financial obligations that are not part of the Profit & Loss statement. This discrepancy highlights the necessity of effectively managing your business cash flow to safeguard against operational problems.

 

Profit vs Cash Flow: What’s The Difference?

To understand the difference between profit and cash flow, and to calculate each one, consider the following:

  • Profit: This is calculated on the Profit and Loss statement (P&L), and is the initial indicator of financial performance. It is usually calculated by subtracting total operating expenses from total revenues.

To calculate your cash flow, start with your profit and then make the following adjustments:

  • Add Back Non-Cash Items: These are adjustments for non-cash expenses like depreciation and amortization, which impact taxable income and profit, but not your cash reserves.  
  • Deduct Non-P&L Expenditures: By deducting cash outflows not reflected in the P&L, such as debt principal repayments or asset purchases.  
  • Deduct Income Taxes: While income taxes are not an operating expense, they still impact your take-home profit, and this is a cash outflow that needs to be accounted for. This is especially important for dentists who operate in a tax-advantaged S corporation.

The Result? Cash flow. This is the physical cash that you have access to at any given time in your business. It’s important to maintain a healthy cash flow balance in order to pay bills like staff wages, taxes, rent, utilities, and supplies. Cash flow is what sustains your dental practice and helps it to grow. 

If your accounting software provides a Cash Flow Statement, become familiar with it. Your Balance Sheet is also key to understanding cash flow. If you do not know how to read your financials, then contact us about our service that helps dentists understand their financial statements.

 

Achieving a Balance Between Profit and Cash Flow

Striking an optimal balance between profit and cash flow is essential to help your dental practice succeed in the long-term. Key strategies include:

  • Effective Accounts Receivable Management: Monitoring outstanding patient balances and insurance claims is crucial for ensuring consistent cash inflows. 
  • Cost Control: Identifying and eliminating unnecessary expenses can increase profit margins without compromising the quality of patient care or raising your prices. 
  • Strategic Financial Planning: Anticipating and planning for seasonal variations in patient volume can help mitigate cash flow challenges during slower periods. 
  • Effective Tax Planning: Minimizing unnecessary taxes as there is no need to pay more than your legal obligation. 
  • Growth Investment: Wisely reinvesting profits into your dental practice can allow for expansion and innovation, though it’s vital to maintain adequate cash reserves for unforeseen expenditures and emergencies.

By adopting these strategies, you can constantly improve your profitability and ensure healthy cash flow. Both of these help ensure sustainable growth and operational efficiency in your dental practice.

 

Nurturing a Financially Healthy Dental Practice

Ensuring the financial health of your dental practice is an ongoing process that demands consistency, strategic foresight, and adaptability. Regularly reviewing your financial statements, staying up to date with market trends, and engaging in continuous professional development can enhance your financial success.

By using technology and software that give you visibility into your dental practice’s profitability and cash flow, you can obtain real-time insights into your financial performance. By partnering with a dental CPA firm, you can make proactive adjustments to your financial strategies. Both of these can help simplify complex financial processes, from automating accounts receivable management to identifying unnecessary expenses, all of which improve your profit and cash flow position.

 

Conclusion

The financial success of your dental practice can be improved by focusing on the relationship between profit and cash flow, and implementing strategies to optimize both. As you continue to deliver exceptional dental care, we want you to see the financial results and success of your hard work.

To find out how you can improve your dental practice profitability and cash flow, or to better understand your financial statements, book a call with our team here at DrillDown Solution.

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Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Ed Gabriel is President and Partner at DrillDown Solution. With over 20 years of experience, he holds a bachelor's degree in accounting from Brigham Young University and is a Certified Public Accountant (CPA).