financial foundations

Go With the Flow

How to analyze your cash flow statement

DAVID MILLS, O.D., M.B.A.

The steady flow of cash is the lifeblood of any business. More businesses go bankrupt due to poor cash management vs. unprofitability.

Where the profit and loss statement (covered in previous columns) measures the business’ net profit, the cash flow statement measures its liquidity. Proper cash flow analysis gives the owner and other potential investors the most comprehensive measures of the health of the business.

Here is a summary of what is included in the statement of cash flows and how to analyze this information:

Reading the statement

The statement of cash flows is divided into these categories:

► Cash flow from operations. In most instances, cash generated from providing optometric services and sales of products is the primary source of cash into the business. All cash received by the practice (inflows) and all expenses paid (outflows) are listed in this section. Owner’s salaries may be included in this section as well. Inflows of cash are posted as positive values, and outflows are negative. Most of the categories listed match those on the same period profit and loss statement.

► Cash flow from investing. In optometric practices, the investing activities typically are the capital expenditures made during the period. As a result, most of the categories listed in this section are outflows. The resale of any equipment during the period would result in an inflow of cash.

► Cash flow from financing. Debt and equity transactions are captured in this section. During the life of any business, monies are borrowed and loans repaid. Monies borrowed during the period are inflow, interest and principal payments are outflow.

Cash flow analysis

The addition of the net values from the three sections determines the cash position of the business at the end of the period.

Numerous strategies can be implemented to improve cash flow. Reducing direct and indirect expenditures may be easy to accomplish in the short term. Proper inventory management, as well as deferring discretionary projects until they provide a positive cash flow, should also be examined.

I recommend reviewing the cash flow statement on a quarterly basis. Comparing similar past quarters reveals a clear picture of the liquidity of the cyclical business cycle.

When comparing similar quarters, you may notice a recent downturn in the available cash during the period. Strategies should be developed to either increase revenues into the practice during that period, decrease the expenses or a combination of both.

For example, during a downturn, the timing might not be optimal to purchase a large quantity of frames when the invoice is due net 30 days. Also, if the cash account is growing, perhaps investment strategies can be used to gain interest on the monies, or the timing might be perfect to take on more debt and make capital improvements to the practice.

Cash is king

As the saying goes, “cash is king.” It is next to impossible for the business to survive without ample supplies.

The savvy business owner routinely monitors the cash inflows and outflows of the practice to ensure proper cash reserves are always available. OM

DR. MILLS PRACTICES AT OCEAN STATE EYE CARE IN WARWICK, R.I., AND HOLDS A M.B.A. FROM PROVIDENCE COLLEGE. E-MAIL HIM AT MILLSD@NECO.EDU, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.