How do you know if your business is successful if you don’t understand how cash flow is calculated? Short answer: you can’t. 

Sadly, there are so many naturopathic doctors and other business owners who still don’t understand it. They think cash flow happens automatically and they have no control over it. That couldn’t be any further from the truth.

In fact, more than 80% of small businesses fail because they didn’t know how to manage their cash flow properly.

That’s why you can’t afford to be complacent. You need to take the time to analyze how you are making money and how you are spending it. 

So what is cash flow? How is it calculated? And is there an easier way to manage your business finances?

What is Cash Flow?

Cash flow is the amount of money being transferred into and out of your naturopathic practice.

Unfortunately, this is where most business owners stop paying attention. Cash flow is a lot more specific than that. 

Too many people make the mistake of thinking that more revenue will solve any cash flow problems. It won’t.

Cash flow is about analyzing the details: 

• How much revenue are you making? Where is it coming from? Is there a better way to earn more money? 
• What are the main reasons clients come to you for help? How often are they coming? Who are your best clients?
• What are all your operating expenses? How can you save money on rent?
• Do you have enough money saved for taxes? 
• When can you finally pay off your medical school debt?

We can use a few different cash flow formulas to answer these questions.

Cash Flow Formulas (Which one is best?)

Here are the three main cash flow formulas according to WaveApps:

• Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure
• Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital
• Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash

But while these formulas help you calculate your cash flow, they’re can be difficult to understand unless you have a background in finance. They also don’t focus as much on maximizing your profit. And you shouldn’t have to use a bunch of different formulas every time you focus on a different financial goal.

At Every Single Bean, we use Profit First. 

Here’s why:

• Profit First helps you understand how much revenue you need every month to cover expenses.
• It helps you know how much you should be allocating to every account and when the best time to do that is.
• Profit First helps you prepare contingencies in case you experience a low month.
• It helps you prepare your business taxes early.
• And if you’re a naturopathic doctor it also helps you pay off your medical school debt.

How to Calculate Your Business Cash Flow with Profit First

Your profit and loss statement won’t give you all the information you need to figure out the health of your business. It just gives you the symptoms. But every naturopathic doctor knows, that’s not enough. 

Using Profit First we can quickly identify if our cash flow is being mismanaged and what the root cause is.

The Profit First formula is Revenue — Profit = Expenses. A bit backwards from what you’re probably used to. But this isn’t just designed to help you pay yourself more. It will help streamline your cash flow as a whole. 

How it Works

Start by creating goals for your business. What’s your monthly revenue target? How many clients do you need to hit that number? What’s your end-of-year revenue target?

If you know how many clients you need, you can calculate your projected operating expenses like payroll, cost of goods and rent.

Then create four foundational accounts.

1. Profit
2. Owner’s Pay
3. Taxes 
4. Operating Expenses

Transfer a percentage of your income into these accounts every two weeks.

Here is an example of what this would look like:

Instead of having to comb through a mountain of invoices and statements every month — or every quarter — you have an active formula helping you keep track of your cash.

You get a better idea of where your money is coming from, you can optimize your operating expenses and you can be proactive about where your money is going.

The key here is to hold yourself accountable. If you’re consistent then you’ll start to see how calculating your cash flow will help your business grow.

The real beauty of the Profit First system is that it’s adjustable. It makes it easy to save money and design contingency plans in case you have a low month.

That’s why a generic cash flow formula isn’t enough.

Summary

You need to know how to calculate your business cash flow if you want to become more profitable. And there are a number of ways to do that. 

So choose an option that is effective and easy to understand like Profit First. It’s the same system we use to help dozens of naturopathic doctors across the country manage their cash flow and maximize their profits.

Give us a call and we’ll show you exactly how you can enjoy healthy profits from your naturopathic practice.