Profit is an accounting outcome. Cash is a timing outcome. A practice can be genuinely profitable and still run short every month.
Profit and cash answer different questions. Profit asks whether the work was worth more than the cost of doing it. Cash asks whether the money arrived before the bills did. A dental practice can be right on the first and wrong on the second for years.
Four things account for most of the gap in dental.
The usual causes, in order.
- Collection lagProduction becomes cash weeks later, and payroll does not wait. The longer the lag and the faster the growth, the wider the gap.
- Debt service is not an expensePrincipal repayment on financed equipment leaves the bank account but never appears on the P&L. A practice with heavy equipment debt shows profit it cannot spend.
- Deferred revenue already spentMembership plan money collected in January and treated as available cash is an obligation to deliver care later in the year.
- Section 179 distortionExpensing equipment in the year of purchase reduces taxable income sharply in that year and produces a profit figure in later years that does not reflect the cash still going out the door.
How to tell which one it is
The diagnostic is a direct comparison of net income to change in cash, with the reconciling items listed. Most owners have never seen that comparison drawn out, because a tax-basis P&L does not produce it.
Once the bridge exists, the fix is usually specific rather than general — shorten the collection lag, restructure a note, or stop treating deferred revenue as spendable — rather than the broad cost-cutting that a cash squeeze normally triggers.
Frequently asked.
Why is my dental practice cash flow negative when I am profitable?
Usually collection lag, principal repayment on financed equipment which never appears on the P&L, deferred revenue that has already been spent, or Section 179 distortion from expensing equipment in the year of purchase.
Does debt principal show up on a profit and loss statement?
No. Interest does; principal does not. A practice with significant equipment debt will show profit that is not available as cash.
General information for practice owners, not accounting, tax, legal, valuation or investment advice for your situation. MedPraxis CFO is not a CPA firm, a registered investment adviser, or a business broker. Talk to your own CPA, attorney or adviser before acting on anything here.