The three lines on your P&L that explain a cash squeeze

A practice can collect more than it did last year, run a full schedule and still come up short on payroll. The instinct is to look for something broken: a payer denying more claims, a staff member overspending, a billing company falling down.

Usually nothing is broken. The money is arriving, just not in the shape or on the schedule the month required.

Three lines on a profit and loss statement account for most of the gap. None is hidden. They are easy to read in a way that hides the problem.

One practice runs through all three below: three physicians, collections near $300,000 a month, operating expenses before owner compensation near $186,000. Those figures are constructed to make the arithmetic visible, not drawn from a survey and not a benchmark.

Overhead is a ratio, not a number

Most owners know overhead as a dollar figure, because that is how it appears on the statement. Taken alone, $186,000 is not information. It becomes information when you divide it by what you collected.

At $300,000 in collections, this practice runs 62 percent overhead. Now say September collections come in at $255,000, because one payer slowed down and a physician was out for two weeks.

Overhead is still $186,000. Rent did not change, salaries did not change, the malpractice premium did not change. Overhead is now 73 percent of collections.

Nothing about how the practice is run changed. The ratio moved 11 points because the denominator moved.

The percentage is as much a statement about collections as about spending, so when it rises, the useful question is which of the two numbers actually moved. If spending held and collections fell, cutting expenses is the wrong first response, and it is the one most practices reach for.

At 62 percent overhead, 38 cents of every dollar collected is available before owner pay. At 73 percent, it is 27 cents.

The statement is running on a delay

The second item is not really one line. It is the distance between when work is done and when money lands, and it touches every line on the page.

Suppose that same practice had a strong September: full schedule, more visits than August, higher charges. The deposits hitting the account in September are not September's work.

If days in accounts receivable run at 46, the average dollar takes about six and a half weeks to travel from date of service to the bank. September's deposits are mostly July and August.

So a strong production month can appear on a cash basis statement as a weak one, and a slow month can look comfortable because the busy month before it is paying the bills. The statement is accurate. It describes a different period than the one printed at the top.

On an accrual basis the confusion runs the other way: the statement shows the strong September, because it records revenue when the work was performed, and the bank balance disagrees.

So before reading any month's bottom line, know your days in accounts receivable and know which basis you are on. The first says how far back the deposits reach. The second says whether the profit in front of you is money you have or money you are owed.

The draw was set in a better month

The third line is the one people are least comfortable naming. Owner compensation is usually set once, during a reasonable stretch, then left alone while everything around it moves.

This practice set draws at $25,000 per physician per month, $75,000 in total, in a quarter when collections averaged $320,000.

In September, collections were $255,000 and overhead $186,000. That leaves $69,000 before owner pay. The draws are $75,000. The practice is $6,000 short before a quarterly estimated tax payment or an annual premium arrives.

The gap gets covered quietly, by a line of credit, by stretching a vendor or by postponing a hire. Nobody calls it paying themselves more than the practice earned, because the draw did not change.

The draw not changing is the point. Of the three lines it is the only one fully within the owner's control, and the one most often left out of the monthly review.

A draw set as a percentage of trailing three-month collections, trued up quarterly, falls when collections fall. That is uncomfortable in the month it happens and far less uncomfortable than the alternative.

None of this calls for a different accounting system or a more elaborate report. All three are already on the statement that arrives every month.

Overhead as a share of collections says what the practice costs to run against what it brings in. Days in accounts receivable says how old the money is. Owner compensation against profit actually collected says whether the draw is still a decision or has become a habit.

Read together, month after month, they turn a cash squeeze into something you saw coming.

Ryan Joneson is the founder of GlassJar, which makes accounting software for small businesses and publishes free financial statement tools. He writes about reading financial statements for people who did not train in accounting.