Whether you are a small Independent business or large conglomerate, effective cash flow management is critical to running a healthy business. Small businesses, like Independent Optometry practices, frequently bear a greater burden as they are less likely to have resources to maintain full time staff to manage all aspects of their accounting. This places more of a burden on OD or Optician practice owners to not only run all other aspects of their Optometry business (i.e. patient care, HR/staff management, practice marketing, inventory, billing, continuing education, etc), but to also ensure they have a keen understanding of the key elements of cash flow and an effective plan for how to manage it.
In this article, we’ll review what cash flow is, what it means for your Independent Optometry practice and the importance of identifying a management plan for your business.
According to the SBA, Cash Flow is simply a combination of the money coming in and going out of your business. Critically important to operations is the timing of this cash movement. A simple cash flow worksheet or “Cash Flow Statement” enables you to see this comparison, with timing, and help you quickly determine if you are in a “positive” or “negative” cash flow situation.
Why is Cash Flow Important?
Managing day to day operations is necessary, but so is the solvency and long term financial goals of your practice. Managing cash flow to maintain day to day operational health is critically important, but losing sight of longer term cash needs can be dangerous and difficult to recover from if not managed well.
From a day-to-day operations perspective, it could seem that business is not only healthy but it’s growing… more patients in the door, more eye exams and more retail sales. Great! However, if a practice only paid attention to their growing business and healthy margins, without a cash flow statement they could miss the reality that their actual bank account is steadily declining. A cash flow statement would help illuminate how and why (delayed receivables, overstock of inventory, staff overtime, increased rent, etc). Those are the elements that can push your practice into the red (finances in the “red” mean losing money and in the “black” is making money).
Beyond maintaining a healthy watch on financial performance, cash flow is also useful for growing your practice. A position of positive cash flow indicates you probably have healthy working capital. That money can be infused or invested into that practice to expand your business, hire new employees, remodel, purchase needed equipment, elevate practice marketing and even make loan payments.
Managing cash flow is the heartbeat of your practice, taking in revenue from a variety of sources and pushing out payments where they are needed.
Cash Flow Elements
Simply put, “positive” cash flow is the state where all monies coming into your practice exceed the money going out of your practice in a particular time period. Conversely, “negative” cash flow means your business has more money going out than it has coming in. While this doesn’t always feel “great,” it is not always a reason to panic.
To get an accurate picture of your cash flow position, there are 3 key areas to make sure you include:
- Cash flow from financing activities (CFF). This is the analysis of monies coming into your practice or being paid out from things like issued equity, debts, dividends or lease payments. This particular aspect of your cash flow statement provides a more accurate picture of your practice’s overall health with respect to funding and how well you are managing that. This can also help determine if it’s time for you to invest in growth or expansion vs. focusing more on stabilizing your practice.
- Cash flow from operating activities (OCF). This analysis breaks down your practice income from regular operations including accounts receivable, depreciated capital expenses, operating expenses and the remaining income after financial obligations are paid over a specific period of time. This analysis is particularly useful to help guide decisions within your immediate control (inventory management, product mix, planogram update to better position product, or even real estate management if costs of your building are eating all your profits, etc).
- Cash flow from investing activities. This considers any cash generated or lost through investments. Similar to your general cash flow, this number could be positive or negative. Regardless, it’s a simple indication that your investments are either performing well, meaning they are making you money, or they are performing poorly and losing you money. While short-term losses are always a risk, the important observation is around consistent performance from investments. If you are consistently losing money as a result of your investment choices, it’s likely time to make a change. Better to observe this sooner, than later, as bad investments can quickly eat into your net cash flow and hurt your working capital.
It all starts with Knowledge
We all know that knowledge is power, and in the case of cash flow it is absolutely true. Many things may feel out of your control as an Independent Optometry practice owner but with the right knowledge, you can get ahead of issues and better protect your finances.
Knowing and understanding the elements of your cash flow can drive confidence in your decision making and peace of mind about the overall financial health of your practice and help you find joy in being an entrepreneur.
If you would like more information on surefire ways to improve your cash flow, please set up an appointment with a CECOP USA representative today.
- SBA.gov. “The Small Business Advocate”
- SBA.gov. “Small Business Facts”
- Entrepreneur.com. “10 Critical Cash Flow Rules”
- Fundera.com “Small Business Revenue Statistics (2021): Annual Sales and Earnings”
SBA.gov. “Frequently Asked Questions”