Why is cash flow important? Cash Flow is a practices earnings before interest, depreciation and amortization and any other personal financial add-backs that will not transfer to the new owner. Cash flow is important because it is used to determine the profitability of a practices operations. So how can this indicator make or break the sale of an practice?
If your practice is profitable and operating at an optimal level, you should not have anything to worry about. But, because these metrics are used to a compare performance, you might want to take a close look at how your practice stacks up.?
Be aware of your Practices Cash Flow. You can determine yours by calculating some numbers from your Profit & Loss statement or Tax Returns. Take your bottom line profit or loss figure and add any interest, depreciation and officer compensation plus any personal items expensed through the business. Knowing your cash flow can provide you with a basic idea of what your practice is worth.
Keep in mind that smart buyers will want to see historical financials to calculate previous years cash flow. Reviewing prior years will give potential buyers an idea of how the practice has performed and how profitable it is.
Practices are valued on a multiple of cash flow. For example, Dental Practice will sell for anywhere from 2 to 3 times cash flow. Although Cash Flow is vital, there are other factors and metrics that will go into determining the value of your practice. Top Line revenue will also be considered, but if there is no cash flow, buyers will question why and may not trust the financials.
Do you need help analyzing your cash flow? A good practice broker, like 1st Med Transitions can typically plug in the numbers and have feedback for you in a day or two. Knowing your Cash Flow is knowing your value!
David Y. Goldstein - Senior Transition Advisor
David has been assisting Doctors with their practice transition needs for over 10 Years has personally been involved in $100+ Million in closed practice transactions.
David can be reached at
(800) 815-0590 or email@example.com.