Why you shouldn't rely on your P&L

November 03, 2019
As a financial advisor, I spend a lot of time pouring through doctors’ financial statements to make sure their business income and value is properly reflected in their planning documents. Usually the first document I receive is the Profit and Loss Statement (P&L). Although P&Ls are the universally accepted way to understand how a business is performing over time, it’s a poor way to understand how a practice is benefiting the owner from year to year.

The problem with P&Ls is that there is almost always a disconnect between the profit number at the bottom and what ODs are able to take out of their practice—and not in a good way. So why is it so off?

First, the name Profit and Loss is a bit of a misnomer for the way an average person thinks. Profit sounds like a number you should be able to personally spend or save from your practice at the end of the year. But the Profit & Loss statement is first and foremost a tax statement. It only considers allowable "expenses" to generate a profit (or loss) number that then feeds into reportable income for tax purposes. Consider this:

  • Depreciation and amortization are debits to a P&L when applicable, although they don’t reflect actual cash going in and out
  • Purchases of equipment or fixtures are considered assets, not expenses, and do not show up a P&L even though cash was used to make the purchase
  • Similarly, while interest is deductible and considered an P&L expense, the principle on an amortizing payment is not; it is an asset and therefore credited to the balance sheet.

If you really want to know how your practice is doing, run your Cash Flow statement. This report shows actual dollars entering and exiting the practice for the time period under consideration. And the number it produces at the bottom—the net increase or decrease in cash—is a better way to measure how your practice is performing for you.

I’ve had the pleasure of having an expanded version of this conversation on an ongoing basis with Dr. Mick Kling, a practice owner in San Diego and Profit First Advisor. If you haven’t heard of Profit First yet, it’s a financial accounting system that takes the guesswork out of practice finances. We’re planning an interview-style webinar mid-November to discuss what exactly the Profit First system is and how it helps ODs maximize the benefit their practice provides to them. If you’d like to learn more or register, CLICK HERE.

Happy financial report reading-

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