A cash flow plan (CFP) or budget, is an annual breakdown listing all sources of income and expenses in your life. The purpose of an annual CFP is to clearly demonstrate all activity in your various bank accounts to hold you accountable for your spending decisions. The CFP will also allocate the amount you will be dedicating towards achieving your financial goals through various savings plans. 

Growing a practice can put a huge strain on cash, as it requires constant reinvestment, and business owners often do not have the necessary buffer of extra cash. Good cash flow management gives you leverage to grow. 

Performing an annual cash flow analysis allows you to forecast and plan ahead, but it is also a great indicator of the financial health of your practice. It allows you to detect early warning signs of shortfalls, if cash outflow is much greater than cash inflow. 

The first step to cash flow planning involves calculating cash inflow. It begins with creating a Profit and Loss (P&L)/Income Statement. This is done by accrual accounting- it requires you to make assumptions about your practice during a specific time period. 

However, it is important to note that the P&L is just a snapshot of your practice. It summarizes the revenue and expenses incurred, but it does not take all essential pieces of information into account. 

The second step is to determine cash outflow– the amount of cash the practice disburses. This is generally broken down into 3 categories: operating activities, financing activities, and investing activities. 

Once you have determined the cash inflow and outflow, you are ready to begin the final step of the process- preparing the cash flow plan. The base year for the CFP is the year the plan is being created. To ensure you have accurate data in your CFP, it is recommended to summarize the activity for the past 6-18 months. All future years in the CFP will be similar to the base year with an adjustment for inflation where applicable. 

While it is important for practice owners to understand the cash flow planning process, it is advisable to seek professional advice to ensure nothing is being overlooked. At MedTax.ca, we are committed to helping physicians optimize their cash flow to ensure they meet their financial goals.

Have more questions on how else we can help with cash flow planning? Call us today at (905) 815-6559

About the Author: Alex Powell

CPA CA, Director

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