A dental practice cash flow statement explains how cash changed during a completed reporting period. Read the operating, investing, and financing sections separately, add their net movements, and reconcile the result from opening cash to closing cash. A larger bank balance does not, by itself, mean operations generated more cash.
This is historical reporting. A 13-week cash forecast estimates future receipts and payments. Use the statement to understand what happened before revising those forward-looking assumptions.
Ask your accountant to prepare or review the statement under the practice's reporting basis. The owner-review process here is practical guidance, not instructions for resolving every accounting classification.
Start with the cash balances the report is meant to explain
Confirm the entity, reporting dates, included accounts, and final report version. Obtain the opening and closing balance sheets, income statement, cash-account reconciliations, and details of equipment and financing transactions.
Ask the preparer to identify cash equivalents and any restricted balances included in the reconciliation. Maintain the same reporting perimeter at both dates, or explain a change. An owner's personal savings account is not practice cash because it might fund the business later.
The IRS emphasizes identifying the source of deposits and reconciling checking accounts in its business-recordkeeping guidance. Apply that discipline before interpreting the statement: unresolved bank differences should not disappear into an unexplained cash-flow line.
Use the completed bank reconciliations as inputs. Do not substitute today's online balance for the book balance at the statement cutoff. Identify any prior-period correction that changed the opening figure.
Read the three sections as different explanations
Operating activities describe the cash effect of running the business. Investing activities include cash purchases and sales of long-lived assets. Financing activities include borrowing and principal repayment. An indirect operating section reconciles net income using noncash and operating-balance adjustments. These are the distinctions in the SEC's guide to cash flow statements.
Put a question beside each subtotal:
| Section | Question for the owner meeting |
|---|---|
| Operating | Which actual receipt or payment pattern explains this amount? |
| Investing | Which approved asset transaction used or released cash? |
| Financing | Which funding or owner transaction changed the balance? |
Ask for the underlying schedule when a label such as “other financing” or “change in other assets” carries a material amount. A broad category may be correct, but the owner still needs to understand the transaction behind it.
If the report instead uses the direct method for operating cash, inspect the actual receipt and payment categories. Do not add those cash totals to the indirect adjustments: they are alternative presentations of operating activity, not two sources of cash.
Follow a complete historical example
All amounts below are hypothetical. Assume an accountant-reviewed accrual statement, unrestricted cash only, and no cash equivalents or other cash movements. The operating section uses the indirect method. Interest already belongs in net income and was paid during the period; there is no separate interest timing adjustment.
| Operating reconciliation | Amount |
|---|---|
| Net income | $24,000 |
| Add back noncash depreciation | +$4,000 |
| Increase in net receivables from operating activity | −$9,000 |
| Increase in operating prepayments | −$2,000 |
| Increase in operating payables and accruals | +$3,000 |
| Net cash from operations | $20,000 |
The calculation is $24,000 + $4,000 − $9,000 − $2,000 + $3,000 = $20,000.
In this example, some reported earnings remain uncollected, cash funded additional prepayments, and some operating costs remain unpaid. These assumptions explain the $4,000 difference between income and operating cash. They do not establish whether collections or payment practices are healthy.
Now complete the other sections:
| Remaining statement | Amount |
|---|---|
| Cash purchase of equipment: investing | −$28,000 |
| Loan proceeds received in cash: financing | +$18,000 |
| Loan principal repaid: financing | −$5,000 |
| Cash owner distributions: financing | −$12,000 |
| Net financing cash flow | +$1,000 |
| Total change: $20,000 − $28,000 + $1,000 | −$7,000 |
| Opening cash | $52,000 |
| Closing cash | $45,000 |
The practice reports $24,000 of profit while cash falls $7,000. Both results can be correct under the stated assumptions. Operations supplied $20,000, but the asset purchase and financing movements produced a net cash decrease.
Trace the $28,000 purchase to its payment and the $18,000 borrowing to its receipt. Do not infer that the same equipment was financed merely because those events occurred in one month. The actual documents decide the connection.
Investigate cash that appears twice or never moved
Use a short exception pass before signing off:
- Match transfers between included accounts so they do not look like outside receipts or spending.
- Compare loan schedules with cash records to detect principal counted again as operating expense.
- Check whether an asset invoice was paid by the practice or settled directly by a lender.
- Identify unpaid purchases and noncash transactions separately for the accountant's presentation review.
- Trace net settlements to their detail when refunds, fees, or offsets obscure the underlying entries.
For example, suppose a lender pays a supplier directly for equipment and no money enters or leaves a practice cash account. Ask the accountant how that noncash financing transaction should be disclosed. Do not invent a practice bank receipt and payment to make the cash statement resemble the purchase invoice.
Similarly, the decrease in a loan balance need not equal a bank payment without checking fees, modifications, and other entries. A balance-sheet difference is a starting point for investigation, not a substitute for transaction evidence.
Use the explanation to improve the next decision
Review several completed periods with the same definitions. Identify whether rising cash came from operations, new borrowing, owner funding, or asset sales. Ask whether an apparent operating improvement reflects stronger receipts or simply a later payment date.
In the illustration, the owner can now discuss the equipment decision and distributions with an accurate cash explanation. The statement alone does not say whether either decision was affordable, prudent, or permitted by a loan agreement.
Use the lender's separate definitions when reviewing a debt-service coverage requirement. Do not assume that the operating subtotal here is the numerator in that test.
Finish with a concise account of the period: opening cash, operating contribution, major asset movements, net financing activity, and closing cash. List unresolved classifications separately. Then update the forecast using the receipt and payment behavior the historical review actually uncovered.
