Profit is an accounting result. Cash is what is in the account. In a dental practice the gap between them usually comes from four places: loan principal payments, equipment and buildout purchases, growth in accounts receivable, and tax owed on income you have already spent.
None of those appear on your profit and loss statement the way you would expect them to, which is exactly why a profitable year can feel broke.
Where does the money actually go?
Loan principal. Only the interest portion of a loan payment is an operating expense. The rest reduces a liability on the balance sheet and never touches the P&L. Real cash leaves the account and your profit number never mentions it.
Equipment and buildout. A capital purchase is generally recovered through depreciation over time rather than expensed at once, and there are elections that change the timing. Ask your CPA which apply to a purchase before you make it, because the cash leaves in one payment while the deduction follows its own schedule. Book profit and bank balance diverge either way.
Accounts receivable. Production is not collection. A growing receivables balance means you have booked revenue nobody has paid you for. That is money you are effectively lending to carriers and patients.
Taxes. Profit is taxable whether or not it is still sitting in the account. An owner who spends distributions through the year and then meets an obligation they did not reserve for is not unprofitable. They are unbanked.
How do you actually see the gap?
Ask your accountant for a statement of cash flows alongside the P&L, and read the two together. The cash flow statement reconciles net income to the change in your bank balance line by line. It is the most useful report that rarely gets opened.
A simpler monthly version you can build yourself:
- Start with net income for the month
- Add back depreciation and amortization
- Subtract loan principal paid
- Subtract capital purchases
- Adjust for the change in accounts receivable
- Subtract owner distributions and tax payments made
What remains should approximate the change in your cash balance. Where it does not, you have found a question worth asking.
How much cash should the practice hold?
Enough to absorb a disruption without borrowing on someone else’s terms. The useful unit is months of fixed operating expenses rather than a flat figure, because a practice with a large team and a large lease needs more absorption than a small one.
The relevant costs are the ones that continue when production stops: payroll, rent, insurance, software, and debt service. Add those, decide how many months of runway lets you sleep, and multiply. That target is yours and it will not match anyone else’s.
Keep it out of the operating account. A reserve sitting in the account you pay bills from is not a reserve, it is a balance you have not spent yet. A separate account you can reach quickly does the job.
Then decide in advance what it is for. Reserves get spent on opportunities as often as emergencies, which is fine when that was the plan and corrosive when it was not.
What changes once you separate the two numbers?
Decisions get cleaner. You stop testing affordability against a bank balance, which reflects timing more than capacity, and start asking what a purchase does to monthly cash flow after debt service and tax.
You also stop being surprised. Cash crunches are rarely caused by a bad month. They are caused by a good month whose profit was already committed to principal, equipment, and tax before it arrived.
The mechanics above are general. How they apply to your entity and your books is a conversation for your accountant.
FAQ
Why does my accountant say I made money when the account is empty?
Because profit excludes loan principal, capital purchases, owner distributions, and increases in receivables, all of which consume cash. Your accountant is measuring what the business earned. Your bank balance reflects what happened to that money afterward. Both numbers can be correct simultaneously.
How much should I hold in reserve?
There is no universal answer, and anyone offering one is guessing about your practice. Anchor on months of fixed operating cost, then adjust for your debt load, your staffing, and how variable your collections have been. A heavily leveraged practice needs a different target than a debt-free one.
Is a line of credit a substitute for cash?
It is a backstop, not a substitute. Availability can be reviewed or reduced by the lender at inconvenient moments, and using it costs money. Some owners keep a line as a second layer while holding actual cash for the earliest and most chaotic stretch of any disruption.