By Robert Schultz and Jeanne Fletcher
Managing “by the numbers” is essential to planning, achieving and documenting practice growth. The first number to compute–and the best barometer of the health of a practice–is net cash flow. Here’s how to compute it and why it’s important.
Net cash flow is the lifeblood of an optometric practice.Positive net cash flow leads to practice growth, improved patient care, and ultimately a lucrative practice sale. Negative net cash flow leads to staff and service cutbacks, smaller inventory, and possibly poorer patient care. In blunt terms, a practice with decreasing or negative net cash flow is dying. It possibly cannot be sold. Eventually, it may have to be shuttered and called a total loss.
As practice CEO, an optometrist always should have the practice’s net cash flow top of mind. Computing this is simple: Add up collected revenues, subtract operating expenses (before debt service and personal compensation). What’s left—the bottom line—is your net cash flow.
The following is a typical cash flow scenario for a practice grossing $1 million.
NetCash Flow ofa $1Million Practice
Eye exam professional fees$ 400,000
Returns and adjustments ($10,000)
Payroll $ 250,000
Overhead $ 100,000
Marketing $ 20,000
TOTAL EXPENSES $ 750,000
NET CASH FLOW $ 250,000
DEBT SERVICE $ 70,000
AND BUSINESS CAPITAL $ 180,000
Net cash flow is the yardstick by which practice valuation is computed. Rule of thumb: The sale price of a practice is 1.5 to 2.5 times net cash flow. Any OD planning an eventual practice sale should bear this in mind and be working a plan to maximize net cash flow.
Video: Robert Schultz on Net Cash Flow
Click on video below to view Robert Schultzspeaking on the importance of cash flow.
Jeanne Fletcher is executive vice president of Vision One Credit Union. To reach her: Jeanne Fletcher @visionone.org.