The importance of cash flow forecasting

If you do not understand how much money you will have in the future to pay bills, make payroll, or make debt payments, then you are operating blindly.

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Many doctors rely on their bookkeeper or certified public accountant to provide them with the necessary financial data they need to run their businesses. While many bookkeepers do provide monthly financial statements for owners, they may not be taking a proactive approach by forecasting the future cash flow of the business. Although CPAs are capable of this type of forecasting, they are not involved in the day-to-day business and ultimately do not know what to anticipate.

Why is cash flow forecasting important? It is important because if you do not understand how much money you will have in the future to pay bills, make payroll, or make debt payments, then you are operating blindly. Forecasting also allows you to anticipate cash shortages and make arrangements before you experience a cash shortfall.

You may be thinking that cash flow forecasting is too much for you to handle. But I believe it is extremely important and something that you should develop with your bookkeeper or CPA. Cash flow forecasting begins by creating a yearly budget, something every company should have. The yearly budget can then be broken down by month, and then by week. Since most dental practices operate on a cash basis, it is important to determine your budget based on when money is going in and going out. For example, if you typically pay your annual malpractice insurance during a certain month, you need to make sure that the payment is budgeted for that month.

Table 1: Balance sheet accounts

Beginning cash balance

$20,000

Minus anticipated loss

($12,000)

Minus cash outflow from balance sheet accounts

($5,000)

Ending cash balance

$3,000

Once the budget is created—and this may take awhile—it is time to forecast cash flow. To properly forecast cash flow, start with your beginning cash balance and add your net profit (or subtract your net loss) according to your budget. Next, calculate the cash out for your balance sheet accounts. You may be budgeting to spend some capital on balance sheet accounts, such as fixed assets or owner distributions. The money spent toward these accounts needs to be deducted from the budgeted net profit, since this is cash spent that will not show up in your budget. This is because your budget will be based on your profit-and-loss statement rather than your balance sheet.

Once you subtract the cash outflow from your balance sheet accounts from the budgeted net profit, you can determine the overall cash in or out that you are anticipating. If you add or subtract this number from the beginning cash balance, you will finally arrive at your budgeted ending cash balance.

I know that everything discussed here contains a lot of financial information that can be very confusing, so allow me to provide an example. Say I put together a monthly budget based on the profit-and-loss statement from the prior year. Based on my budget, I anticipate that I will show a loss of $12,000 during January. I currently have $20,000 in my bank account, assuming all of the checks that I’ve written have been cashed.

In order to anticipate the cash balance at the end of January, I would deduct the $12,000 in anticipated loss from the $20,000 that I have in the bank, which leaves me with $8,000. Next, I need to take a look at my balance sheet budget to see how much I intend to spend. I notice that I have a monthly practice debt payment of $5,000 that needs to be taken into account. All of a sudden, my $8,000 at the end of January decreases to $3,000. This is a big difference, and the balance sheet accounts are one of the areas that people may forget to include in their forecasting (table 1).

I recommend doing both 13-week and 12-month cash flow forecasts. This way you can see during both the short term and long term whether you will be short on cash during any time period.

In conclusion, cash flow forecasting is a proactive approach to managing your business. It will keep you from experiencing any surprises in the coming months and will allow you the time to manage other areas of your business rather than worrying about whether you have the money to meet the upcoming payroll.


ANTHONY MAGLIETTA, MBA, is the controller and CFO at the Silverstrom Group, a multispecialty dental practice in Livingston, New Jersey. Reach him at amaglietta@gmail.com.

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