Over the past 15 years I have seen that the most successful business owners are also good managers. That is, they know their numbers. They review the monthly accounting statements; they know what the numbers are telling them, they know which numbers they can change, and which numbers they can’t. In essence, the accounting information guides the decisions they make to grow their practice. However, if the numbers are not accurate or do not present enough information, then the practice owner will be basing his/her decisions on poor data, which will make for poor decisions or the lack of decisions altogether. Therefore it is important to understand what exactly accounting/bookkeeping is, who should be completing it, and how it benefits you as a practice owner.

Medical professionals commonly ask “Well, what is the difference between accounting and bookkeeping?”

Let’s start off by saying that all accountants need to know how to do bookkeeping — debits and credits, ledgers, etc. Bookkeeping, without getting into the history, is simply the act of keeping books using the double-entry system. Bookkeeping involves recording transactions in the correct accounts (e.g. expenses, revenue, assets, and liabilities), reconciling accounts (e.g. bank reconciliation) and finally drafting a trial balance. Sounds like what an accountant would do, right? Well, yes, it is. All told, the tasking of accounting and bookkeeping is essentially the same thing. However, an accountant would take the task one step further, and use the trial balance to generate meaningful financial statements. An accountant is trained to have comprehensive bookkeeping knowledge, and must continue to practice their double entry accounting skills. What is important is that your company’s accounting/bookkeeping is completed by a Chartered Professional Accountant (CPA) or a seasoned bookkeeper; so that you have the peace of mind that your practice’s transactions are being recorded and maintained correctly.

How does this benefit you, the medical professional?

First, having accurately prepared accounting information assists in the efficient preparation of your practice’s year-end tax return. Accurate tax returns are important to any practice; penalties and interest can apply if the taxes are not calculated properly. Second, accounting tracks the expenses, revealing where too much money is being spent or if not enough is being spent in a particular area of the practice. Third, it will show you whether your practice is bringing in enough cash to cover expenses, debt payments, and your withdrawal, salary, or dividend. However, this cash flow information is not revealed in the income statement, but instead in the cash flow statement. The cash flow statement is surprisingly not presented to many practice owners by their advisors. In my opinion, it is the most useful and important statement to the practice owner in running his/her practice for one simple reason, it tells you whether or not your practice is generating cash!

This article “Cash Flow is King” presents a situation with a client and how the cash flow statement cleared up the confusion on their company’s financial performance.

I first met Dr. Jennifer Benoit (the real name has been changed for confidentiality purposes) during a dinner party at a mutual friend’s house. Jennifer was a chiropractor who owned a health & wellness clinic, and was operating it through a professional corporation. “I really enjoy running my own business, every day is different”, she said. It was refreshing to hear Jennifer speak so positively about her business. Jennifer further explained that although she was satisfied with how her business had progressed; she felt it had reached a plateau. “The cash balance in the business bank account is not really growing, and my dividend has been the same for the past couple of years”, she explained. Jennifer and I met for lunch a couple of weeks later, and she brought her most recent monthly income statement, balance sheet, corporate tax return, for me to look over.

‍The Issue
‍I reviewed the income statement and it looked good, the company showed revenue of $31,000, direct costs of $11,000, payroll expenses of $6,000, administrative expenses of $7,000, which left a profit/net income of $7,000. Jennifer receives the cash for virtually all of the revenue earned in any month, as patients pay in cash/debit card or by credit card. I then reviewed the balance sheet and noted that the business had a $120,000 loan on which it was making payments of $3,000/month. Jennifer had also disclosed that she took $6,000/month for her monthly withdrawal/dividend. The issue was that these transactions were not presented to Jennifer in a manner which showed how they impacted her business.

Monthly Income Statement (Summarized)

“Your business lost money this month, Jennifer — it lost about $2,000”, I said. “What are you talking about? The income statement says I made $7,000”, she replied. What Jennifer did not realize is that the income statement only presented what the clinic made strictly from operations.

‍The Solution
‍I explained to her that the impacts of the withdrawal/dividend and loan payment transactions are not reflected in the income statement; instead they are presented on the cash flow statement — which she had never seen. A cash flow statement was then prepared for the month in review and presented to her.

Monthly Cash Flow Statement

‍The Results
‍Although Jennifer was upset that she lost money this month, she was motivated to dig deeper and find out what was the true situation in prior months. We analyzed the prior month’s information; some months showed positive cash flow and some months showed negative cash flow. After taking into account the entire fiscal year, the business broke even, the positive cash flow months made up for the negative cash flow months. Jennifer was relieved that she finally understood why her business performance was static.

More importantly, she became aware of the revenue goals that she would need to achieve to grow the business, “So, basically I need to reach about $35,000 in revenue to have a ‘good month’ (positive cash flow)”, she said. “Correct, you’ll be able to pay all of your expenses, your monthly withdrawal, and debt payments, and gain a $2,000 increase in cash for the month”, I replied. This information motivated Jennifer to determine how many more appointments she would need to book and where she could cut costs, in order to generate positive cash flow in any given month.

Jennifer engaged KCPA to complete her corporation’s monthly accounting/bookkeeping and year-end corporate tax return preparation. Although she appreciates the balance sheet, income statement, and bank reconciliation that is provided to her every month, the cash flow statement is the first statement she looks at.

Monthly Cash Flow Statement — Positive Cash Flow

"This is great, now I know how my business is really doing." — Dr. Benoit