For healthcare practices, the choice of accounting method isn’t just a compliance decision; it’s a strategic one. Yet many medical and dental practices often operate on a method that may not fully reflect the economic reality of their business. Understanding the difference between cash and accrual accounting, and when each is appropriate, is key to improving financial clarity and decision making.
Cash vs. Accrual Method
The cash method of accounting recognizes financial transactions not when they take place, but when cash is actually received or paid out. Because revenue and expenses are recorded only when money changes hands, cash basis accounting makes it easy to track cash flow and provides a real-time picture of available capital. This method is simpler to manage and involves less administrative complexity than the accrual method; however, because healthcare revenue cycles are inherently delayed due to insurance reimbursements, patient collections, and adjustments, cash basis reporting can distort performance by understating revenue in high-production periods or overstating results when collections catch up.
The accrual method of accounting, on the other hand, recognizes revenue at the time when it is earned and expenses at the time they are incurred, rather than when cash is exchanged. By aligning financial transactions with the period in which goods or services are actually provided or received, the accrual method provides a more accurate picture of an organization’s financial performance. While the accrual method requires more work on the administrative end (such as tracking receivables and payables), it offers more comprehensive insights into the practice’s financial performance. Cash flow, however, must still be monitored separately.
Which accounting method is best for your business?
The accounting method you should choose depends largely on your intended use, as well as the structure of your practice. The cash method may make sense for smaller practices with relatively simple operations due to its ease of use and low administrative burden. However, for larger practices with multiple providers or locations, and those that rely heavily on large insurance reimbursements, the accrual method may be recommended. Not only does accrual accounting result in a more accurate depiction of profitability, but it also helps guide key decisions related to long-term planning and practice management, such as budgeting, forecasting, and cash flow management. However, practices may use both strategically: accrual method for internal reporting, KPIs, and strategic decisions—and cash method for managing liquidity, forecasting, and tax reporting.
Reporting and Benchmarking
Regardless of the method used, financial and operational reporting should be utilized internally by the practice regularly to benchmark its performance against industry peers and to track its progress against strategic goals. There are many relevant KPIs that could be tracked on an ongoing management dashboard, but a few primary ones are accounts receivable aging and net collections percentage.
To sum up, here’s a bird’s-eye view of both methods:
Cash Accounting
- Revenue is recorded when it is received
- Expenses are recorded when they are paid
- Simple to manage
- Less administrative burden
- Easy to track cash flow
- Provides a real-time picture of available capital
- Less beneficial for long-term planning
- Useful for managing liquidity, forecasting, and tax reporting
- May be appropriate for smaller practices with relatively simple operations
Accrual Accounting
- Revenue is recorded when it is earned
- Expenses are recorded when they are incurred
- More administrative work and complexity (i.e., must track cash flow separately)
- Provides a more accurate view of financial performance
- Helps guide decisions related to practice management, such as budgeting, forecasting, and cash flow management
- Makes it easier to benchmark your profitability
- Better for large or growing practices
- May be required for reporting to external stakeholders or lenders
Partner with RBT for Expert Accounting Guidance
RBT CPAs’ healthcare accounting team is here to advise and support your organization in all matters accounting, tax, audit, and advisory. Give us a call today and find out how we can be Remarkably Better Together.