Breaking down financial statements: A checkup for your dental practice.

Understanding your financial statements is key to managing your practice’s financial health.

This article will break down the three essential documents that provide a full picture of how your practice is doing: the balance sheet, income statement and statement of cash flows.

Let’s start with the balance sheet. Think of it as a snapshot of your practice’s financial position at a specific point in time. It lists your assets — what you own, your liabilities — what you owe, and your equity — your stake in the business. The balance sheet follows a simple formula: Assets equal liabilities, plus equity. It’s a quick way to see where your practice stands on any given day.

Next is the income statement, or profit and loss statement. While the balance sheet is a snapshot, the income statement shows your practice’s financial performance over a period — whether that’s a month, a quarter, or a year. It outlines the revenue you’ve earned and the expenses you’ve incurred, giving you a clear picture of your profitability during that time. This is where you’ll find key performance indicators — or KPIs — that show how efficient your practice is at generating revenue and controlling costs.

Finally, we have the statement of cash flows. This document tracks the actual movement of cash in and out of your practice, breaking it down into three categories: operating, investing and financing activities. While the income statement shows your profit, the cash flow statement reveals how much cash is on hand to cover expenses, investments and debts.

All three of these financial statements work together to give a comprehensive view of your practice’s health. The balance sheet shows your financial position, influenced by information from both the income statement and the statement of cash flows. Your income statement reveals how revenue and expenses impact your profitability, which affects your equity and cash position, as shown on the balance sheet. The cash flow statement complements this by showing the actual movement of cash, which is critical for assessing your practice’s liquidity and its ability to meet obligations.

Together, these financial statements help you evaluate your practice’s performance, stability, and prospects for growth. If you need help understanding these documents or want to ensure your practice is on solid financial footing, reach out to your trusted advisors, like your dental CPA or a Commerce Bank representative opens in a new window.