Unfortunately, I often hear the managing partner of a veterinary business say “I don’t understand what is wrong. At the end of the year, our accountant told us we made a profit but there was no money in the bank.” Occasionally, one of those managers decides to fire the accountant because she/he was so wrong.
This situation is 100% explainable because we as veterinarians do NOT receive adequate business education. We don’t have a good understanding of the three basic financial statements: Profit and Loss Statement or Income Statement, Cash Flow Statement and Balance Sheet.
As the practice conducts its business, the accounting system tracks and records the financial transactions of the business. At the end of a period of time in the life of the business, the information is used to prepare the financial statements for the business. Like water flowing down hill, money flows through the financial statements. “Net Profit”, the bottom line of the P&L, becomes “Cash Flow from Operating Activities”, the top line of the Cash Flow Statement. “Free Cash Flow”, the bottom line of the Cash Flow Statement becomes “Cash”, the top line of the Balance Sheet.
Profit on the P&L only represents the difference between the businesses operational income and expenses that directly relate to producing cash.
That is part of the story of cash. As I explained in the water flowing downhill simile, the net income/cash is the top line of the cash flow statement. All non-operational sources and uses of cash that affect the value of a non-cash asset on the balance sheet are recorded on the Cash Flow Statement. What defines sources and uses of cash is the topic of a BIG BLOG to be posted at a later date. Trust me on this for now. The Cash Flow statement simply compiles the total of Net Profit with the sources and uses of cash to define Free Cash Flow.
Cash is the top line of the Balance Sheet. The Balance sheet is the business equivalent of a personal Net Worth Statement. It accounts for all of the assets of the company including the equity owners are building in the company.
Your P&L CAN NOT tell you how much cash you have. Only after you look at your balance sheet will know you know how much cash you have.
Your financials are like a three chapter book. Chapter one is P&L. Chapter two is Cash Flow. Chapter three is Balance Sheet. If you stop reading after the first chapter you will have no idea how the story ended.
If you took the time to read and understand the previous 430 words, I absolutely guarantee you that you are in the 99th percentile of veterinarians’ command of financial statements. That’s not a bad place to be…