As a group of dental practices, managing finances is a critical component of ensuring the success of each individual practice and the overall group. One essential decision that must be made is choosing the accounting method to use when reporting financial information. While there are two primary accounting methods – cash basis and accrual – accrual accounting is generally the preferred method for groups of dental practices due to its advantages in accuracy and consistency.
Accrual accounting is a method that records financial transactions when they occur, regardless of when the payment is received or made.
In contrast, cash basis accounting records transactions only when cash changes hands. For example, under the accrual method, a dental practice would record the revenue earned when services are provided, even if the payment is not received until a later date. Under the cash basis method, the revenue would only be recorded once the payment is received.
One of the most significant advantages of accrual accounting is the ability to provide a more accurate picture of the financial health of a dental practice. This is particularly important for a group of practices that may have complex financial transactions between individual practices. With accrual accounting, the group can see all revenue and expenses as they occur, allowing for a more complete understanding of the financial state of the group as a whole.
Accrual accounting also allows for greater consistency in financial reporting. By recording transactions when they occur, the method ensures that revenue and expenses are properly matched, providing a more accurate representation of the financial performance of the group over time. This consistency makes it easier to compare financial performance year over year and between individual practices, allowing for better decision-making and strategic planning.
Additionally, accrual accounting provides better insight into future cash flows for the group. By recording revenue when services are provided, the method allows the group to forecast expected cash inflows with greater accuracy.
This is important for making financial decisions about investments, expenses, and growth opportunities for the group.
In contrast, cash basis accounting can lead to inconsistencies and inaccuracies in financial reporting. With this method, revenue and expenses are only recorded when cash changes hands. This can result in revenue being recorded in one year and expenses in another, making it difficult to accurately compare financial performance over time. Additionally, cash basis accounting does not provide insight into future cash flows, making it more challenging to make informed financial decisions for the group.
Another advantage of accrual accounting is that it provides a more complete understanding of accounts receivable and accounts payable for the group. Accounts receivable are amounts owed to the group by patients, insurance companies, or other entities. Under the accrual method, accounts receivable are recorded as soon as services are provided, providing a more accurate picture of the group’s outstanding balances. This allows the group to better manage its cash flow and ensure that it has the resources it needs to meet its financial obligations.
Similarly, accounts payable are amounts owed by the group to vendors, suppliers, or other entities. Accrual accounting ensures that these liabilities are recorded as they occur, allowing the group to better manage its financial obligations and avoid cash flow issues.
In conclusion, accrual accounting is the preferred accounting method for groups of dental practices due to its advantages in accuracy, consistency, and insight into future cash flows. By recording revenue and expenses when they occur, the method provides a more complete picture of the financial health of the group and allows for better decision-making and strategic planning. While cash basis accounting may be simpler to manage in the short term, accrual accounting provides greater benefits in the long run and is essential for groups of practices looking to grow and expand their impact on the communities they serve. – Guest written by: Ken Kaufman
Ken Kaufman is a veteran President & CFO of venture capital and private-equity-backed dental companies. He helped quadruple a fast-growth DSO and achieved similar success with other DSOs. He is currently the President and CFO of Nuvia Smiles and a partner in the DEO.He founded the Dental Finance Forum, the first mastermind group of finance leaders in dental organizations.
He earned a BS in business from Brigham Young University and an MBA from the University of Georgia in finance and entrepreneurship. Ken and his wife have been married for twenty-four years and have eight children together. He is active on social media and loves to connect with others in the industry on those platforms, Facebook and LinkedIn specifically.
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