The Cash Flow Statement is much less commonly used than the income statement or the balance sheet. However, it is equally important as a financial tool. Many small businesses find themselves in financial trouble, not because of poor profitability, but because they run out of cash with which to pay their bills. Revenue (sales) may be good, and expenses shown on the income statement are typically manageable. But the actual cash to use for writing checks is often too low to cover those checks.
The cash flow statement is a lot like a checkbook: it’s a representation of the actual cash/check transactions that occur. The purpose of the cash flow statement is to project upcoming cash receipts, outlays, and balances. Practitioners can then prepare for periods of low cash, by:

• Holding cash in reserve, instead of paying out items that can be deferred;
• Encouraging prompt payment by patients, perhaps even offering an incentive to do so;
• Not making purchases that will become due during times of low cash;
• Emphasizing collection procedures early enough to bring in cash before it’s needed;
• Not taking a “draw” at those times; and/or
• Arranging for bank or vendor financing if the low cash period will be too long for the above alternatives to be viable on their own.

An optometric practice tends to be a somewhat cyclical business. September is often a high month for revenue, resulting in plenty of cash for October. December, on the other hand, is usually a low revenue month, which leads to January being a low cash month. More apparent are the fluctuations in cash levels within a month. In areas in which third-party plans represent a substantial part of patient load, many

Developing your Cash Flow Statement is very easy – so easy, really, that any practitioner who does not use one should feel guilty. Here’s how to make one:

1. Design a sheet similar to the sample (see Figure 1). Make two columns (estimated and actual) for every day for a three-month period.
2. Start with the practice’s current checking account balance, plus any cash on hand.
3. List every item the practice will pay during a month.
4. Fill in the “Estimated” boxes with regularly anticipated amounts that will either be received or paid on each day, using the practice checkbook register, going back several months as a guide. Using that information, project receipts and payments for the coming three months. Be careful to note when the cash will actually be needed. For example, many practitioners pay their rent on the 30th, not the first, so note the cash outflow in the box for the 30th. Update the estimates as new information warrants.
5. Each day’s ending cash balance becomes the next day’s starting cash balance.
6. Each day, fill in the actual amounts.
7. On regular graph paper, plot the daily actual ending cash balance.
8. Do this every day for three months. Findings and resulting actions may then allow a practitioner to track cash flow by the week instead of daily. But a practitioner should not go to weekly cash flow tracking until good control over the day-to-day cash situation has been achieved.

Checking the graph (see Figure 2), it becomes easy to predict low-cash days and prepare for them in advance. Good luck.