During a consultative call recently, I was asked one of my favorite questions: “Why isn’t the profit on my P&L in my checking account?”
I’ve been thinking a lot lately about how ODs manage cash and cash flow (I even discussed it with my friend Adam Cmejla on his 20/20 Money Podcast).
On the podcast, one of the points I made is that a chart of accounts (the layout for financial statements) doesn’t have a specific account for profit. While there are lines for profit, like Gross Profit, Operating Income (Profit), and Net Income (Profit), you will never categorize profit as an expense.
Profits are a calculated value on your P&L. While they’re not meaningless, they’re not as tangible as the Gross Collected Income that enters your accounts from patient-paid fees and third-party payments. Neither are they as concrete as the cash payments that go out to your vendors, employees, and even yourself if you’re on the payroll.
Profits matter because cash flow will be negative without them. However, bills, payroll, and owners are paid out of cash, not profits.
How Profits Turn into Cash
Profits represent the income remaining after generating revenue from operating activities and paying out the expenses tied to those activities. Net income will even include things like interest, stimulus funds, and non-cash expenditures like depreciation and amortization.
But not everything shows up on your P&L.
- If you pay cash for an instrument, both sides of that transaction affect the Balance Sheet (cash goes down, assets go up) before the depreciation shows up on your P&L.
- If you take out a loan for equipment or a build-out, the principal payments you make toward your loan only show up on the balance sheet.
- When you take cash out of the business, your distributions only show up on the balance sheet.
- And when you don’t take cash out of the business, undistributed profits remain on the balance sheet as retained earnings.
Skip the “Profit Account” and Take a Distribution
Since profits are a calculation, not a destination for money, there’s no need to put money in an account named “profit.” Instead, once you have more cash in your checking account than you need (after accounting for taxes, servicing loans, and upcoming bills), you should take a distribution.
Are you wondering how much is enough? Books & Benchmarks clients can view the cash movement in their practice and get guidance on how much cash to leave in their practice with my favorite chart:
Your Balance Sheet is Key to Managing Cash
Returning to the original question, the difference between profits on the P&L and cash in the checking account is the activity that only shows up on the Balance Sheet.
The Statement of Cash Flows produces the clearest picture of where cash is spent in a practice, as it combines the profits from the P&L with investing and financing activities (debt service AND distributions are financing activities).
This is why Books & Benchmarks prioritizes accurate Balance Sheets. If your P&L profits look great and cash is still tight, the answer is on the Statement of Cash Flows which can only result from a good Balance Sheet.
If you want financial statements and reporting that give you a crystal-clear picture of what’s happening with overhead, profitability, AND cash flow, contact us today to learn how Books & Benchmarks can take over your monthly business accounting and reporting.
