When analyzing a practice, how do you know how much true cash flow the practice has available? You cannot simply look at a practice’s tax return or a profit and loss statement and know how much cash flow the practice has. There are a number of steps that someone evaluating a practice would take into consideration when determining the correct cash flow. Those steps are as follows:
- Start with the Net Income of the practice. This is the total revenue or collections minus the total expenses.
- Add back the owner’s salary and any taxes associated with the owner’s salary.
- Go through the expenses and “add back” those items that are non-essential to the practice. These are expenses that are for extra-curricular or out of the ordinary expenses. These typically include travel, staff meetings, interest, depreciation, owner life insurance, etc.
- Calculate what your debt service payments will be by using a mortgage amortization calculator. You can use bankrate.com or another online calculator. Use a conservative interest rate based on current market rates for practice loans and a 7-year term. Subtract the debt service payments from the above 3 items.
- The result will be the cash flow to the practice after debt service based on the current state of the practice. This will be how much is available to a potential buyer for his/her personal salary, upgrades, updates, etc.
This Sample Cash Flow Analysis shows that without changing a thing, you will earn $92,041 from the practice after paying the note payment on the loan. Note that you can’t stop here. If the cash flow looks low, there may be a reason. The current state of the practice may not be the best run practice. Perhaps salaries are too high, the owner uses the most expensive vendors, or they employ a family member to clean the office at a high salary. There may also be procedures in the practice that the current doctor does not do, but you can. If you keep looking at a low cash flow practice and know how to fix the problems, you may have stumbled upon an incredible opportunity.
If you need help analyzing the cash flow of a practice, or how you can improve a practice, you can call us anytime for a free consultation. We can be reached at (877) 866-6053 or email at firstname.lastname@example.org.
Correction: In a previous version of this post, Net Income was incorrectly labeled Gross Income in the calculation of Cash Flow. We apologize for the error and any confusion.