THE BUSINESS OF PRACTICE: WORDS OF WISDOM FROM EVERYDAY PRACTICE
$517,405.70 but the breakdown of the line item re- veals that the fraction representing owner distribu- tions is $219,682.26. Therefore, although at first glance a business generating $382,137.92 netting $193,703.10 in net income sounds good, the owner is taking too much cash out of the business to be sus- tainable. Horizontal trend analysis used here would reveal if this was an ongoing trend or if the distributions are unusually high for this period. The excessive distributions have contributed to the loss of $49,724.96 in available cash flows at the end of the period as seen in Example C. In addition, the
financial statements allow us to determine the rate of annual growth of accounts receivable and inven- tory. If these growth rates exceed that of the rev- enue growth rate, cash is being depleted and is considered unsustainable. Frequent analysis of one’s financial statements is one of the most valu- able tools available to practice owners to assess the strengths and weaknesses of their business. State- ment analysis is not a complicated process but the more one looks at them, the more one will learn and the more comfortable one will be in the information one gleans from them.
