One of the ‘tricky’ things about your financials is that you have to look at your Income Statement, Cash Flow Statement and Balance Sheet before you can make an educated decision about purchasing equipment.
Keep in mind that your income statement and your operating budget contain no information about equipment purchases. Your Cash Flow Statement and Balance Sheet tell the story of equipment purchases.
As a review from an earlier financial Friday, the first line on your income statement (P & L) is the Gross Revenue generated by your practice. The bottom line of the income statement is net profit. A very common mistake is to believe the net profit is the amount of money there is to distribute among the owners. WRONG!
The bottom line on the income statement, net profit, becomes the top line on the cash flow statement, cash from operations. The cash flow statement tracks sources and uses of cash during the reporting period. If you sell an old ultrasound machine and buy a new one, the cash flow statement will show a source of cash, for the amount of money you received for the old unit, and a use of cash for the amount of money you paid for the new unit. The net of those two transactions, selling and buying, will be subtracted from cash from operations.
For example, if your practice's net profit was $65,000, that amount of cash would roll to the top line of the cash flow statement. If you sold the old ultrasound for $5,000 and paid $35,000 for the new one and we assume those were the only cash flow entries in the reporting period (this is an example and you will almost never have only two transactions on your Cash Flow Statement) your cash flow statement would look like this.
Cash from operations $65,000
Source of Cash from sale of equipment $5,000
Use of Cash purchase of equipment ($35,000)
Net Change in Cash ($30,000)
Cash Position (end of reporting period) $35,000
Continuing our example, three entries would be made on the balance sheet,
the $35,000 Cash Positon at the end of the reporting period will roll to the top line of the balance sheet and be added to the cash on hand at the end of the last period.
The asset ‘old ultrasound’ will be deleted
The asset ‘new ultrasound’ will be added
About this time of year, veterinarians begin thinking about end of the year purchases. The take home message is that you have to look beyond your P&L (income statement) to your cash flow and balance sheets to see how much money you have to spend.
I see a tremendous number of bad decisions made by only looking at Net Profit and making a decision to buy equipment. There is often a terrible surprise when the veterinarian discovers the practice didn’t have sufficient cash to make the purchase.
When you hear someone say, or worse yet, you say “I’m going to fire my accountant-she says I made a profit but there is no money in the bank!” You immediately know that person did not look at her own cash flow and balance sheets!
In reality your practice needs two budgets, an operating budget based on the P&L and a capital budget based on cash flow and balance sheet. If you begin 2017 with both, you will have a much less stressful and probably more profitable year.
Unfortunately, veterinarians were never taught the fundamentals of business. It is up to us to learn about business while we are in business and that often adds up to some expensive tuition! Our goal at IsMyPracticeHealthy.com is to provide you with opportunities to gain the business education we all wish we had at the beginning of our veterinary careers. Hang in there, your can get it!