Finances

How to Compute Net Cash Flow

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

GROSS REVENUES
Optical dispensary sales $ 610,000
Eye exam professional fees$ 400,000
Returns and adjustments ($10,000)
TOTAL ADJUSTED REVENUES $1,000,000

EXPENSES

Cost of goods $ 300,000
Payroll $ 250,000
Overhead $ 100,000
Occupancy $ 80,000
Marketing $ 20,000

TOTAL EXPENSES $ 750,000

NET CASH FLOW $ 250,000

(Then subtract)
DEBT SERVICE $ 70,000
PERSONAL COMPENSATION
AND BUSINESS CAPITAL
$ 180,000
Net Cash Flow = Growth
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 = Practice Sale
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.
The next installment,”Managing by the Numbers,” will compute typical net cash flow for three optometric practices of varying sizes.
Video: Robert Schultz on Net Cash Flow

Click on video below to view Robert Schultzspeaking on the importance of cash flow.

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Robert Schultz is president and CEO of Vision One Credit Union in Sacramento, Calif. To reach him: BSchultz@visionone.org.
Jeanne Fletcher is executive vice president of Vision One Credit Union. To reach her: Jeanne Fletcher @visionone.org.
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