I had someone say to me the other day, "It looks like I'll be making a profit my first year in practice. Isn't that great?!" Well, yes and no. Making a profit isn't all it's cracked up to be. Making your cash flow work is more important. You can be profitable on paper and still go out of business.
Let's look at an example. Cash is a month-by-month operation where you look at what comes in and what goes out. What comes in (income) must be greater than what goes out (expenses and your personal draw or salary). If you do a cash flow analysis and a pro forma P&P (profit and loss) statement, the P&L might show that, at the end of the year, you had a profit of, say $100,000. But if in months one through six you don't have enough money coming in, your company won't last until the end of the year. If you are short $5000 cash at the end of month one and $4000 at the end of month two, and you don't have anything to cover this $9000, your creditors (like your landlord and the bank) are going to come after you demanding payment. See what I mean?
The bottom line: Pay attention to cash. Watch it closely. Get a bank loan for enough "working capital" to keep at the ready in case you can't pay your bills each month.
For more information on how to set up your financial systems for practice, read Planning for Practice Success.
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