Reading Financial Statements¶

There are three financial statements every business owner needs to read: the Profit & Loss, the Balance Sheet, and the Cash Flow Statement. If you can read them — even at a basic level — you are already running your practice more intentionally than most physicians who own one.

The Three Statements and What They Tell You¶

Each answers a different question. You need all three to have a complete picture.

The Profit & Loss Statement (P&L)¶

Also called: Income Statement.

What it shows¶

Revenue minus expenses over a period of time, ending in net profit (or loss). Think of it as a video — it covers a span of time.

Example (monthly)¶

Revenue
  Membership dues                 $18,000
  Employer contracts               $3,000
  Dispensing                       $1,200
  Ancillary services                 $800
  Total revenue                   $23,000

Cost of services
  Dispensed medication cost          $600
  Medical supplies                   $400
  Lab pass-through                   $300
  Total cost of services           $1,300

Gross profit                      $21,700
Gross margin                          94%

Operating expenses
  Rent                             $1,200
  Malpractice insurance              $350
  Business insurance                 $150
  EMR subscription                   $200
  Software / tech                    $150
  Marketing                          $250
  Professional fees (CPA/legal)      $300
  Office supplies                    $100
  Phone / internet                   $120
  Continuing education               $200
  Licenses and dues                  $100
  Total operating expenses         $3,120

Operating profit                  $18,580
Operating margin                      81%

Owner compensation                $12,000
Payroll taxes (employer share)     $1,000

Net profit                         $5,580

The figures are illustrative, but they hang together: $18,000 in dues is about 180 members at the $98.64/month national average adult fee (State of DPC 2026 survey; see Pricing Your Practice), and $350/month for malpractice sits inside the kit's $300–800/month estimate. Note that the 81% operating margin is measured before owner compensation; after it, net profit is $5,580 ÷ $23,000, about 24%. Which of those two numbers you call "margin" matters when you compare yourself with anyone else.

What to look at¶

• Revenue trend — is it growing month over month?
• Gross margin — is the cost of delivering care eating into revenue?
• Operating expenses as % of revenue — are overhead costs creeping up?
• Net profit — is there money left after everything, including your compensation?

What "profit" means if you're a sole prop or single-member LLC¶

If you're not on formal payroll, your "owner compensation" is actually a draw, not an expense. The P&L may show a larger "profit" number that includes your take-home, and that larger number is what self-employment tax and income tax are computed on. Your CPA will clarify how to read this for your entity type; Tax Planning Basics covers the mechanics.

The Balance Sheet¶

What it shows¶

A snapshot at a single point in time of everything the business owns (assets), owes (liabilities), and the owner's stake (equity). Think of it as a photograph — one moment, frozen.

The rule¶

Assets = Liabilities + Equity. Always. This is non-negotiable accounting math.

Example¶

ASSETS
  Current assets
    Business checking              $15,000
    Business savings (tax reserve) $12,000
    Accounts receivable             $2,000
    Total current assets           $29,000

  Fixed assets
    Equipment (net of depreciation) $3,500
    Total fixed assets              $3,500

  TOTAL ASSETS                     $32,500

LIABILITIES
  Current liabilities
    Credit card balance             $1,200
    Deferred membership revenue     $6,000
    Accrued payroll                   $800
    Total current liabilities       $8,000

  Long-term liabilities
    Equipment loan                  $2,500
    Total long-term liabilities     $2,500

  TOTAL LIABILITIES                $10,500

EQUITY
  Owner's contributions            $10,000
  Retained earnings                $12,000
  TOTAL EQUITY                     $22,000

TOTAL LIABILITIES + EQUITY         $32,500

What to look at¶

• Cash position — do you have enough in checking/savings to cover 2–3 months of expenses?
• Deferred revenue — if you collect ahead, this liability represents care you still owe members
• Debt load — how much does the business owe relative to what it owns?
• Owner's equity growth — is your stake in the business increasing over time?

The Cash Flow Statement¶

What it shows¶

How cash actually moved in and out of the business during a period. Splits movement into three categories:

1. Operating activities — cash from day-to-day practice operations
2. Investing activities — cash spent on or received from equipment, property, or investments
3. Financing activities — cash from loans, owner contributions, or distributions

Why this exists¶

A practice can be "profitable" on the P&L and still run out of cash. This statement explains the gap.

Example mystery: Your P&L shows $8,000 profit this month. Your bank balance went down $4,000. Where did the money go? The cash flow statement might reveal you paid off a loan ($6,000), bought equipment ($3,000), and your deferred revenue dropped because members stopped paying annually. The P&L and cash flow tell different stories — both are true.

Simplified example¶

The month below is not the same month as the P&L example above; it follows the mystery just described.

Cash flow from operations
  Net income                      $8,000
  + Depreciation                    $200
  - Increase in A/R                ($500)
  - Decrease in deferred revenue ($2,000)
  Net cash from operations        $5,700

Cash flow from investing
  Equipment purchase             ($3,000)
  Net cash from investing        ($3,000)

Cash flow from financing
  Loan principal payment         ($6,000)
  Owner draw                       ($700)
  Net cash from financing        ($6,700)

Net change in cash              ($4,000)
Beginning cash                  $19,000
Ending cash                     $15,000

What to look at¶

• Operating cash flow — is the business generating cash from its core activity? If not, something is wrong even if the P&L looks healthy.
• Financing cash flow — are you relying on loans or owner contributions to stay afloat?
• The bottom line — did cash grow or shrink this period?

A Monthly Review Routine¶

Fifteen minutes. Every month. Preferably the same day each month (e.g., the 5^th).

1. Open the P&L for the prior month.
2. Look at revenue. Up or down vs. last month? Why?
3. Look at net profit (or operating profit if you're sole prop).
4. Open the balance sheet. Check cash and deferred revenue.
5. Look at the cash flow statement if anything surprises you.
6. Write down one question and ask your CPA or bookkeeper at your next check-in.

That's it. Most small-business owners never build this habit; fifteen minutes a month is enough to be an exception.

Ratios Worth Knowing (Optional)¶

Don't chase metrics. A few are genuinely useful:

• Gross margin = gross profit ÷ revenue. For a DPC practice with minimal supplies this is very high; the 85–95% range used in this kit is an illustrative assumption, not a survey figure. The example above is 94%.
• Operating margin = operating profit ÷ revenue. This is how efficient your overhead is. Decide once whether owner compensation sits above or below the operating-profit line, and keep it there; the example above is 81% before owner compensation and 24% after.
• Months of runway = cash on hand ÷ monthly operating expenses. Aim for at least 2–3 months; 6+ is safer. The balance sheet above holds $27,000 in cash against $3,120 of monthly operating expenses, roughly 8.7 months.
• Current ratio = current assets ÷ current liabilities. Should be > 1.0, ideally > 1.5. The balance sheet above gives $29,000 ÷ $8,000, about 3.6.

See Key Business Metrics for a DPC Practice for DPC-specific metrics beyond these general ones.

What This Section Doesn't Teach¶

• How to prepare these statements from scratch (your software does it)
• How to audit a statement for fraud (you're probably not the target)
• GAAP vs. IFRS distinctions (irrelevant for a small DPC practice)
• Consolidated or comparative financial statements (not relevant yet)

The goal is literacy, not fluency. You're a reader, not a writer. That's enough.

Key Takeaways¶

• Three statements, three different questions. You need all three.
• The P&L is a video; the balance sheet is a photo; the cash flow statement explains the gap between them.
• A "profitable" practice can still run out of cash. That's why cash flow exists as its own statement.
• Fifteen minutes a month reading your own statements is the single highest-leverage financial habit you can build.

Next¶

• Cash Flow Management — acting on what the cash flow statement reveals
• Key Business Metrics for a DPC Practice — DPC-specific numbers worth tracking
• Working with Accountants & Bookkeepers — who can help you interpret the numbers
• Tax Planning Basics — how the profit line turns into a tax bill

Read through and figures checked on 2026-09-22.