Accounting and finance are critical functions from the perspective of operational viability and profitability. Due to its ease and simplicity, a dental practice might choose cash-based accounting.
This might be fine initially, but as a practice grows and patient volumes increase, it must consider opting for accrual accounting for RCM. The practice must also comprehend the distinctions and advantages between the two accounting methods and how they can impact its operations.
Based on plans and the vision, a dental practice may benefit from accrual accounting and its compliance with GAAP and IFRS. If a practice intends to sell the firm or merge with another, then accrual accounting would be preferable as GAAP financial statements always reflect consistent financial results.
External parties including investors, through the dental revenue cycle, can promptly judge if the practice is financially sound, operationally viable, and profitable.
A practice can depend on attaining accurate and reliable financial information with accrual accounting. Such data is crucial when a practice needs to make decisions concerning new hires, renovation of premises, team training, software automation, or revised compensation structures.
In this method of accounting, revenue is documented when a transaction has happened and not when it is paid. When accounts receivable and accounts payable are both included in the accounting statement, it allows a more precise prediction of future cash flows and profitability.
Large dental practices or chains prefer accrual-based accounting as it helps to create quarterly financial statements for comparison as well as a calendar year rolling period that offers a precise financial perspective and overview. This enables the practice or potential investors to decipher if the business is operationally viable, profitable, and financially stable.
As the method propagates the recording of transactions as they happen, it ensures that revenue and expenses are accurately matched. As mentioned earlier, this provides a clearer picture of the financial performance of the practice over time.
Such consistency makes it simple to evaluate and compare financial performances thereby empowering better planning and decision-making. A practice also gets better insights about cash flows as revenues are recorded when services are provided. This also helps the practice to envisage cash inflows with greater precision.
Accuracy, consistency, and the ability to forecast future cash flows are primary benefits of accrual accounting and the impact it can have on revenue cycle management is as follows:
The receipt of payment is not important with accrual accounting and revenue is recorded at the time of delivering services and solutions. Consequently, the revenue of the practice gets matched with the services that are provided.
This helps to match specific revenue flows with expenses that were incurred to earn the revenue. This can be of great help to a practice as one can gauge profitability based on the service provided. Armed with such data, a practice can determine how specific services can be priced as well as decide on which services need to be promoted.
The team can detect expenses such as salaries, supplies, rent, and utilities when incurred and not when paid. This provides a clearer understanding of running costs and profitability. Another help is with inventory as the team can identify the expense of goods when used and not when bought. One can get a better idea about the cost of items and current inventory levels. The team can forecast supplies more easily and avoid overstocking.
Accrual accounting helps the practice to manage the billing function efficiently. It also enables the team to follow up on accounts receivables. In this method, a practice records services provided to patients as accounts receivable even if payment has not been made. Thereafter, the team can monitor outstanding payments and follow up for timely collections from patients or insurance organizations.
A practice can derive more precise financial data when it adopts accrual accounting. Such data is crucial for accurate budgeting and financial planning. The team can make better judgments and decisions regarding team hires or planning for future investments or expenses as it has an insight into expected capital outlays and revenue forecasts.
This method fosters complete compliance with globally accepted accounting standards such as IFRS (International Financial Reporting Standards) or GAAP (Generally Accepted Accounting Principles. This helps ensure that financial reporting is consistent, precise, and transparent. This is vital for fostering trust with financial institutions, investors, and regulatory bodies.
Accrual accounting offers a flexible approach that enables a dental practice to sync expenses with corresponding revenues. The team must grapple with expenses incurred while providing a service or procedure.
Once the practice can determine the cost of the service that needs to be rendered, it can implement an effective and competitive pricing strategy. This ensures that a patient pays a fair price for the procedure or service while the practice stays profitable.
Hence, such transparency can help craft robust billing strategies that enhance cash flows. Invoices can be raised at the earliest and follow-up can happen promptly.
Accrual accounting is a mode of choice for many practices as it offers benefits such as accuracy, consistency, and visibility of future cash flows. When the team records revenue and expenses as and when they happen, one gets a complete perspective of the financial state of the practice. This enables insightful decision-making and strategic planning to stay profitable as well as expand its reach and garner more patients.
