Why Owner Distributions Must Tie to Net Income—Not Just Available Cash

In pediatric practices—especially those owned by multiple physicians—the process of paying out year-end owner distributions can get messy fast if the group isn’t disciplined about connecting distributions to the practice’s true financial performance. Too often, groups distribute whatever cash happens to be in the bank at year-end, only to find themselves scrambling in January when operating expenses come due.

There is a simple, reliable, CFO-approved rule that prevents nearly all of these issues:

Always tie owner/partner distributions to net income, and pay the lesser of (1) distributable cash on hand after reserving January operating expenses or (2) the owners’ allocated share of net income.

This single framework protects the practice, ensures fairness among partners, and strengthens financial stability year after year.

1. Start With the Practice’s Net Income—Not Cash in the Bank

Net income represents the actual earnings of the practice:

• Revenue earned

• Minus expenses incurred

• Adjusted for depreciation, amortization, and other normal accounting entries

It is the true economic activity of the practice.

Cash on hand, however, is simply a balance—one that fluctuates daily based on timing of payroll, vaccine purchases, payer payments, rent drafts, loan payments, and countless other transactions.

When groups distribute based on the bank balance alone, they often overlook:

• Upcoming payroll obligations

• Vaccine bills not yet paid

• Rent or mortgage drafts

• Staff bonuses or accruals

• Q1 seasonality and slower collections due to paitent deductibles resetting

• Line-of-credit draws that inflate cash but do not represent income

This leads to confusion, partner frustration, and occasionally emergency capital calls.

Net income should always be the starting point, because it reflects what each partner earned—not what happened to be sitting in the bank on December 31.

2. Calculate Each Partner’s Allocated Share

Once the practice determines its net income, the next step is allocating that income according to the ownership or compensation arrangement—whether equal ownership, productivity-based, tiered partnership classes, or a hybrid structure.

This allocation creates a clear, defensible answer to the most important question:

“How much did each owner actually earn?”

From here, the group can evaluate whether it has the cash to distribute the full amount—or if cash constraints require a reduced payout.

3. Determine Distributable Cash: The “Available Cash Minus January Reserve” Rule

Even when the owners earn a healthy profit, the practice cannot distribute more cash than it truly has available.

A sound financial approach is:

1. Determine the cash balance on hand at year-end.

2. Subtract a January operating reserve—typically one month of expenses (or more, depending on the practice’s risk tolerance).

3. The remaining balance is distributable cash, assuming no other cash commitments exist.

This ensures that on January 2, the practice does not find itself short on:

• • • Payroll

    • Rent

    • Vaccine purchases

    • Benefits and retirement plan contributions

    • Malpractice premiums

    • Other fixed expenses that hit early in the year

Pediatric practices in particular experience seasonal cash troughs after the holidays, as well-visit volume slows and collections lag due to insurance deductibles resetting. A January cash reserve protects the practice from needing emergency owner loans or drawing on a line of credit simply because too much cash was distributed in December.

4. Pay the Lesser of Net Income or Distributable Cash

With both owner earnings and available cash established, the group applies a simple rule:

Each owner is paid the lesser of (1) the amount they earned based on net income or (2) the practice’s available distributable cash.

This prevents two major financial pitfalls:

Pitfall 1: Over-distribution

Paying out too much cash forces the practice into unnecessary debt or emergency capital calls.

Pitfall 2: Unequal or unfair distributions

If distributions are based only on cash, not net income, owners may receive amounts disproportionate to their actual earnings—creating avoidable conflict.

By grounding distributions in net income and then capping payouts based on real cash availability, the practice protects itself while treating every owner equitably.

5. If Cash Is Insufficient to Pay Full Net Income Distributions—Document the Shortfall

If a partner earned more (based on net income) than what can be distributed, the practice should:

• Record the unpaid amount as a distribution payable (or similar equity line item).

• Monitor it through the year as cash improves.

• Pay it out only when doing so does not jeopardize operating liquidity.

This approach maintains transparency and accountability while preserving cash flow stability.

6. Why This Matters: Protecting the Practice and the Partners

Using this framework:

• Ensures fairness among owners

• Prevents cash-flow crises

• Keeps financial statements clean and accurate

• Reduces the risk of partner disputes

• Supports long-term stability and practice valuation

• Aligns with what banks, accountants, CFOs, and buyers expect during due diligence

In short, it protects the practice from itself. Many financial problems in medical groups arise not from poor operations, but from over-distribution and under-planning.

Conclusion

Year-end distributions should never be a guessing game, a tradition, or a bank-balance sweep. They should follow a disciplined financial logic that ties owner earnings to the practice’s actual economic performance while reserving the cash needed to operate the practice safely.

By paying the lesser of net income or distributable cash (after reserving January expenses), practices maintain stability, transparency, and fairness—allowing every owner to plan confidently and every practice to enter the new year on solid financial footing.