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To Grow, To Maintain, Or Both?

In the mid-1990s, I became the CFO of a family-owned service and manufacturing entity that had been in existence for approximately 30 years. The family held real estate and operating entities that focused on the servicing of signs and construction of billboards across the southeastern United States. The billboard division had recently acquired the patents for several cutting-edge components, which are now used throughout the billboard industry. Upon arrival to the company, I became acutely aware of the condition of their accounting records and overall financial picture. What occurred in the next eight months, leading up to my decision to depart the company, was an experience that resonates still today.

Trent Watrous, CPA, CFA, CFE

The lesson I was taught by my sheer presence at this entity was based upon the appearance of the business having a large facility that was well

equipped with cranes and heavy manufacturing equipment, an able-bodied loyal group of employees, and the promise of greener pastures via the recent purchase of a product line. From the perspective of appearances alone, the entity was all a young CPA could have asked for in the scope of a professional opportunity. But then, I began to learn this distinct lesson, which remains front of mind when analyzing any small business: cash flow is everything.

Although the entity had several hundred billboard locations which provided for predictable income checks to arrive monthly, the volume of cash “outflows” quickly eliminated the deposits to the checking account. Almost every asset in the business was over-leveraged with debt. Equity was simply a dream. The construction, installation and maintenance of signs on buildings was predictable, but not highly profitable. A cloud simply hung over the company that read: Too much month at the end of the money. The lack of cash flow demonstrated itself in two ways: the inability to grow and the struggle to meet current obligations.

Let me be more specific.

For a business to grow, additional capital generally must be invested to create inventory for future sales and through marketing for additional customers to become aware of the product or services offered. When capital from banks (aka loans) cannot be obtained or the owner cannot reinvest in the business (aka lack of excess cash), the ability to create growth is capped, given inventory is not present to sell and customers are not aware of the product line. Growth of a business and cash flow are woven so tightly together that one could be a predictor of the other.

For a business to maintain itself, cash flow must be present to pay employees, repay vendors, and provide for the business owner’s compensation. If the current financial demands on cash flow limit a business from timely compensation of employees or the timely repayment of accounts payable obligations, the wheels come off quickly. Low morale among employees, accounts payable vendors ceasing delivery of needed supplies, and mental stress on the owner who must juggle who gets what available cash and when, becomes a norm in which the business doesn’t thrive, and hardly survives.

So, the question of cash flow becomes: To Grow, To Maintain, or Both? Based on first-hand experience and the knowledge / training of a CPA, I assure you that the answer is BOTH.

At the end of the day, the business of dentistry is no different than any other small business: cash flow is vital for the long-term health of the entity. A dental practice having excessive debt cannot grow into offering additional services when training cannot be paid for or investments into new technology cannot be made. A dental practice that cannot pay dental distributors for the required supplies to operate will soon find the dental rep not accepting new orders for delivery…a reasonable response.

A national bank executive recently asked me about the health of dental practices in the southeast. My response was this: I would estimate that one to two practices out of ten are not paying their bills on a regular basis. I further explained my concern in the response was that if a dental practice is not able to grow or sustain itself in this thriving economy, how will the practice survive during the next recession when cash flow constricts even further?

As a Dental-specific CPA, I cannot stress enough the concept of practice owners having a true working knowledge of their cash flow and an honest assessment of what must change or must be protected to keep the environment of both economic growth and financial stability present. Create success in your dental practice through the continual awareness of a key business concept, cash flow..

Trent leads the Dental Services Practice at WSW CPAs.

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