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.
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.
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.
The following is a typical cash flow scenario for a practice grossing $1 million.
Net Cash Flow of a $1 Million Practice
Optical dispensary sales $610,000
Eye exam professional fees $400,000
Returns and adjustments ($10,000)
TOTAL ADJUSTED REVENUES $1,000,000
Cost of goods $300,000
TOTAL EXPENSES $750,000
NET CASH FLOW $250,000
DEBT SERVICE $70,000
PERSONAL COMPENSATION AND BUSINESS CAPITAL $180,000
A positive net cash flow allows an optometric practice to grow. It allows you to increase staffing to meet the needs of a growing patient base. It allows for an expanded eyewear inventory and office and dispensary renovations, steps that, in turn, can increase sales. It allows for new instruments and expanding facilities or acquiring or opening other locations.
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 Schultz speaking on the importance of cash flow.