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997: Metric Mondays: Cash Flow Gap – Miranda Beeson

Your accountant says your practice is profitable. So, why doesn't it feel like it? In this episode, Kirk Behrendt brings back Miranda Beeson, ACT’s director of education, to break down the cash flow gap, what it is, and how not understanding it affects your practice. To learn how to close your cash flow gap so you can grow your practice, listen to Episode 997 of The Best Practices Show!

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Main Takeaways:

  • When your cash flow gap is wide, it creates more work without creating more wealth.
  • A widening cash flow gap affects decision-making around investing in your practice.
  • Your P&L doesn't tell the whole story. Be sure to review your cash flow statement.
  • Track draws, distributions, and other activities to monitor practice health.
  • Plan and budget for your taxes so that you're not panicking last-minute.

Quotes:

“The cash flow gap, while it's not a metric, is a concept or an element of that grander metric conversation that measures the difference between what the practice appears to earn on paper and what actually shows up as usable money for the owner. It's that gap between gross profit and true profit. So, for example, as a coach, it's hard for me to even help make decisions about your practice without fully understanding the profitability of your practice and where all of that money is going. At the bottom of your P&L, it's going to say one thing. But what's hitting the bank is going to say something else. It's going to tell a different story. There's this gap there that we call the cash flow gap, and it's not on your P&L — it's on your cash flow statement and it's on your balance sheet.” (2:18—3:05) -Miranda

“There are three profit areas. You have your P&L statement, and there's what's called gross profit. That's at the bottom there, and your accountant tells you — you might look at it and go, ‘It's $327,000, which puts me in the top 10% of all dentists in the United States! Whoo!’ Well, then you have to pay yourself, you've got to pay your associates, and you've got to pay all that kind of stuff. Then, you have net profit after all that's done. But then, there's another area that's called true profit. All of your debt payments and your tax payments — those don't show up anywhere in there. That's where you're like, ‘Well, I don't have any money!’ So, you’ve got to know gross profit, net profit, and true profit.” (3:18—4:00) -Kirk

“Gross profit is your profit prior to paying yourself and or associates. Then, we have our net profit after we've paid ourselves, after the dentist is paid. So, that difference between net profit and true profit is generally draws and distributions, tax allocation . . . loans, and debt services. So, while at the bottom of that P&L that net profit might say $327,000, if we have a substantial amount of money going out in taxes, loan payments, draws and distributions throughout the year, we're not going to see that or feel that at the end of the month or at the end of the year because, technically, it's still pulling from that bankable amount.” (4:15—5:05) -Miranda

“When we look at the cash flow gap, it answers that question of, if the practice is profitable, why doesn't it feel like it? We hear that a lot from practices when we have clients coming into our coaching community, into the BPA, where they're producing, they're getting the gross production, and then they're looking at all of these elements and they're saying, ‘Okay. Well, it says that I have a net profit this month of $20,000. But where is it?’ So, that's where we have to look at that cash flow gap and that cash flow statement and really start to dig to find where that net profit is starting to sneak away from us, where if we can maximize and tweak that gap in a way that we're modeling behavior, budgeting and understanding that a little bit better, it's one more element or way that we can impact true profitability in a positive way.” (5:07—5:59) -Miranda

“When we have a widening cash flow gap, it's going to create chronic financial pressure despite how strong our production is and how hard our team is working. If we're collecting 100% but we have 12 loans that we're servicing, at the end of the day, it's not going to resonate as money in the bank. We're going to feel like we're working really, really hard — because we are — and we're not going to actually see it stacking in terms of wealth versus just work, like we talked about in that last podcast. There's uncertainty around personal income, uncertainty around our lifestyle planning, retirement planning, vacation planning, reluctance to invest in technology, or the team, or growth of the practice in any way. We start to be way more stressed around these investments that we need to make back into the practice when that cash flow gap widens, and we have less and less profitability opportunities.” (8:11—9:08) -Miranda

“This is the gap where dentists often experience stress. But it doesn't correlate with what they're talking to their CPA about when they're looking at their P&L. It feels like they're working really, really hard and, ‘I just don't ever feel like I'm getting ahead, but I'm busier than ever.’ . . . And dentists, a lot of times, are confused if it's a production problem, a collections problem, or an overhead problem. Like, where is the problem? So, being able to look at the data and dissect — because the majority of the time, what they hear and what they know is, ‘I just need to do more. I don't have money in the bank, at the end of the day, so I need to do more. I need to produce more. We need more patients. Let's add one patient to every hygiene schedule every single day.’ It's looking at the top instead of looking all the way down at the bottom and saying, ‘What's happening to my cash flow gap that might be impacting this?’” (9:09—10:00) -Miranda

“Don't rely on your P&L, only, to be the end of the story. If you have not ever seen, or when you get your documents from your CPA you don't bother looking at your cash flow statement because it doesn't make sense to you, get familiar with your cash flow statement and understand the financing activity that's happening. It'll say “financing activity” or something very, very similar to that so you'll know, ‘Oh, I had $300,000 in net profit, but I had $100,000 in financing activity. That must be the loans that I had on that equipment that I bought,’ or whatever it might be. ‘That's part of why that money didn't land in the bank. Oh, and I also took some draws and distributions this month. That's another reason why it's not the full net profit amount in my bank.’” (14:13—15:05) -Miranda

“The other key area that . . . we have to push pretty hard for is modeling for and planning for taxes. So, in our [GAPs] Scorecard, there's actually a row that is indicated for budgeting for taxes. It doesn't mean you're paying your taxes every month, because most people are paying quarterly or annually. But you're at least planning and budgeting for your taxes every single month so that you can really see, were we really profitable? Can I spend any of that on the practice, or do I need some of that allocated for when tax time comes so that I'm not strapped and freaking out and panicking when I have a tax bill that needs to be addressed? So, don't settle on just your P&L. Start to get comfortable with your cash flow. If you don't even get a cash flow statement from your CPA, you can take one step back and start with requesting it.” (15:06—16:01) -Miranda

Snippets:

0:00 Introduction.

1:09 The cash flow gap, explained.

3:12 The gap between gross profit and true profit.

6:00 How the cash flow gap impacts your practice.

13:52 What you can do to impact your metrics.

18:00 Last thoughts.

Miranda Beeson, MS, BSDH Bio:

Miranda Beeson has over 25 years of clinical dental hygiene, front office, practice administration, and speaking experience. She is enthusiastic about communication and loves helping others find the power that words can bring to their patient interactions and practice dynamics. As a Lead Practice Coach, she is driven to create opportunities to find value in experiences and cultivate new approaches.

Miranda graduated from Old Dominion University, and enjoys spending time with her husband, Chuck, and her children, Trent, Mallory, and Cassidy. Family time is the best time, and is often spent on a golf course, a volleyball court, or spending the day boating at the beach.
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