Profit Is an Opinion. Your Bank Balance Is a Fact.
Accountants have repeated a version of this line for decades: profit is an opinion, cash is a fact. They usually say it with a knowing smile, then drop it. In a dental practice, it deserves more than a smile, because the gap between the two numbers is where owners lose years without noticing.
My version is more specific: profit is an opinion shaped by tax elections. That doesn’t mean profit is made up. Profit follows rules. But the rules offer choices, and the choices change the number. Timing a purchase, electing accelerated depreciation, or setting an S-corp salary against distributions can each move reported profit without moving a dollar in the bank.
The objection worth taking seriously
A sharp reader will say that most practices file on a cash basis, so profit is already cash. That’s half right, and the half that’s wrong is the whole point. Even on a cash basis, three items separate what you report from what you keep:
- Loan principal. You pay it in cash every month. It’s never an expense. It reduces your bank balance and leaves your profit untouched.
- Depreciation. It’s an expense on the return. No cash leaves when it’s recorded; the cash left when you bought the equipment, often in a different year.
- Owner draws and distributions. They leave the account. They don’t appear on the P&L at all.
An illustrative example (made-up numbers, not any real practice)
- A practice reports $400,000 of net profit.
- Add back $60,000 of depreciation, since no cash left for it this year.
- Subtract $120,000 of loan principal.
- Subtract $350,000 in owner draws.
The bank balance fell by $10,000 in a “$400,000 year.” Taxes are still owed on the full $400,000.
Nothing in that example is fraud, error, or bad accounting. Every number is correct, and the owner still ends the year with less cash than he started with. This is how a practice grows broke on paper that says it’s doing fine.
Why the bank balance isn’t the whole answer either
If profit can mislead, a bank balance can too. A single day’s balance can be inflated by a line-of-credit draw, by holding vendor payments, or by patient prepayments for treatment not yet delivered. So a snapshot isn’t the fact. The fact is the direction of the balance over time, net of what you already owe.
What to do this week
- Pull your month-end bank balances for the last 12 months.
- Calculate the change from the first month to the last.
- Put that next to last year’s net profit, then walk the difference with the three items above: add back depreciation, subtract principal, subtract draws.
If the math closes, you understand your practice’s cash. If there’s a gap it doesn’t explain, that gap is your next question. Is cash trapped in receivables, or is it leaking somewhere you haven’t looked?
The profit number is a report about your year. The bank balance, watched over time, is the year itself.