Your P&L tells you whether the practice made a profit. The cash flow statement tells you where the cash went. It splits money in and out into three groups, and reading it explains most of the gap between profit and your bank balance.
The three sections
- Operating activities. Cash from running the practice: member payments in, rent, payroll, supplies and labs out. It starts with your profit and adjusts it for things like unpaid invoices and bills.
- Investing activities. Cash spent on, or received from, long-lasting things, like equipment or a buildout.
- Financing activities. Cash from loans and owners: loan money in, loan principal out, money you put in, and draws or distributions you took out.
Most bookkeeping software builds this report from your P&L and Balance Sheet, so you don't have to make it yourself. You only need to know where to look.
Add the three together and you get the change in cash for the period. That number should match the change in your bank balances from start to end.
A made-up example
Say your P&L for the quarter shows $30,000 in profit, but your cash went up only $6,000. The cash flow statement might show:
- Operating: $27,000, because an employer still owes you $3,000.
- Investing: minus $9,000 for a new ultrasound machine.
- Financing: minus $12,000, made up of $3,000 in loan principal and $9,000 in owner draws.
$27,000 minus $9,000 minus $12,000 is $6,000. Nothing went missing. You can see exactly where it went. This post covers the same gap from the P&L side.
What I look for
- Is operating cash positive month after month? If running the practice uses more cash than it brings in, that's the first problem to solve.
- Is operating cash close to profit? A big gap usually means unpaid invoices or bills that are piling up.
- How much went to equipment and loans? Those don't show up on the P&L, but they leave your account.
- How much did you take out? Owner draws live in financing. Compare them to operating cash.
When it doesn't help
The statement is only as good as the books under it. If accounts aren't reconciled, or transfers between your own accounts are miscoded, the numbers can mislead you. Here's why reconciliation comes first.
What I'd do this week
- Ask your bookkeeper for last quarter's cash flow statement.
- Find the three section totals and add them up.
- Check that the total matches the change in your bank balances.
- Compare operating cash with profit for the same period.
Common questions
Do I need this every month?
Monthly is great once you're comfortable reading it. Quarterly works too. It matters most in months with big purchases, new loans or large draws.
Why isn't my loan payment on my P&L?
Only the interest is an expense. The principal reduces what you owe, so it shows up in the financing section instead.
Is this the same as a cash flow forecast?
No. The statement looks back at what happened. A forecast looks ahead at what's likely to happen with your cash.
Want to see where your cash goes?
We reconcile your books every month and send your P&L and Balance Sheet by the 15th, so the cash flow numbers built on them are ones you can trust. If that's what you need, apply to work with us.