Let's explore the least understood financial report: the statement of cash flows. This document shows the relationship between your Balance Sheet and your Income Statement (the Profit & Loss). It helps you know how your money flows into and out of your practice. That sounds pretty straight forward, but there are some factors that we don't often think of. Here are six reasons why the statement of cash flows is so important for the financial stability and growth of your healthcare practice.
A statement of cash flows does exactly what its name suggests; it tracks the movement of cash into and out of your healthcare practice. It breaks this down into three key categories:
Operating Activities: This is money generated (i.e. income) or used (i.e. expenses/purchases) by your practice day-to-day. It includes income from patient payments, insurance reimbursements, and expenses like staff salaries, supplies, and rent.
Investing Activities: This is all about what what your assets (what you own). Money isn't always in the bank; it can get tied up in larger purchases such as medical equipment or or in expanding your facility. If you've purchased or sold any higher-priced equipment or renovating a brick-and-mortar, this is where you'll find those records.
Financing Activities: This section deals with how you finance your practice. It includes loans, payments on loans, and paying yourself as the business owner.
One of the significant benefits of a statement of cash flows is its ability to help you forecast future cash flows. By examining your practice's historical cash flow patterns, you can make informed predictions about your future financial health. Most practices don't fail because they don't make a profit; most fail because they run out of cash. The two are related, but very different.
Healthcare practices, like any other business, need to maintain liquidity (i.e. cash in the bank) to cover immediate expenses. In other words, you need enough money in the bank to pay your staff and purchase medical supplies each month. In addition, you still need to have enough left over for when equipment breaks down, or taxes are due, or the insurance premium is due. A healthy cash flow from operations means you can cover your day-to-day costs without strain and still have something left over for the infrequent or unexpected expenses as well as some leftover for profit.
Is your practice considering a significant expansion, such as opening a new clinic, bringing in a new practitioner, or investing in advanced technology? Your statement of cash flows can guide these decisions. By examining the financing and investing sections, you'll see how much cash is available for those big purchases and whether it's the right time to take on additional debt or seek investors.
Debt can be a double-edged sword. On one hand, it can fuel growth, allowing you to invest in essential resources. On the other hand, excessive debt can lead to financial instability. Your statement of cash flows helps you assess how your practice is managing debt. Can you meet your loan obligations and still have cash for expenses, or are you struggling? This insight is vital for maintaining financial health.
In our unpredictable world, you're going to encounter unexpected challenges, like staff turnover, equipment breakdowns, or changes in reimbursement rates. A well-prepared statement of cash flows helps you stay prepared for these surprises. By doing things to maintain a healthy cash flow (like diet and exercise help maintain a healthy blood pressure), you can rise to the challenges that occur without nearly as much stress or disruption to your practice's operations.
You wouldn't create a treatment plan for a patient without some sort diagnosis, right? It's the same thing here. Without knowing the diagnosis of how your cash flows, you can't really treat your healthcare practice to help it heal and thrive.
So, as you continue to provide top-notch healthcare to your patients, remember to give your practice's financial health the attention it deserves. After all, a strong financial foundation ensures your ability to deliver outstanding patient care for years to come.
Sarah Binger is a bookkeeping professional and business advisor who works with growing naturopathic, integrative, and functional health practices, med spas, and health and wellness centers. She specializes in helping practitioners grow sustainably. Sarah excels in nurturing businesses to diversify their revenue streams and scale up services. Her passion is to help the healers to have a healthy, thriving business so they can truly live their best dream life.