In this video, Marcus Dillon, CPA and Client CFO, walks through why cash basis accounting is better for some dental and medical practices. You can also read about the benefits of cash basis accounting below.
Why is cash basis accounting recommended for simple medical and dental practices?
In short: remember the "K.I.S.S." principle, keep it simple and straightforward. Cash basis accounting is a method of financial reporting where revenue and expenses are recorded when cash is received or paid. While cash basis financial statements could pose a challenge to analyzing trends or securing financing due to timing of accounts receivable and accounts payable, the advantages to using cash basis reporting for smaller medical and dental practices outweigh any disadvantages.
Keep It Simple and Straightforward
Cash basis accounting is straightforward and easy to understand, making it suitable for small medical practices with limited accounting resources. It doesn't require complex adjustments for accounts receivable and accounts payable. This allows the owners and leaders of the practice to know the financial position of their business at any given moment. Investopedia.com sights ease of use as a benefit to the cash basis method in their article, Cash Basis Accounting: Definition, Example, Vs. Accrual.
Cash is King
With cash basis accounting, revenue is recorded when patients pay for services, and expenses are recorded when payments are made. This provides a clear and immediate view of the practice's cash flow, which can help with short-term financial planning. All practice owners need to have a clear picture of income and expenses to properly manage cash flow as well as maintain or increase profit margin.
Tax Savings? Yes, please!
In some cases, cash basis accounting may offer tax benefits, especially for practices with fluctuating income. It allows you to defer recognizing income until it is received, potentially reducing your taxable income in a given year. No one wants to pay tax on revenue that has not been received. Here is a list of a few more "Hidden Tax Opportunities for Dental Professionals."
For medical and dental practices that primarily collect fees at the time of service or shortly thereafter, cash basis accounting aligns with the cash collection cycle. This provides a more accurate reflection of the business's financial performance.
In cash basis reporting, revenue is recorded only when cash is received, which lowers the risk of overestimating income compared to accrual accounting, where income can be recognized before it's collected. Like we mentioned before, this is not only a tax benefit but also useful in managing cash flow.
Cash basis accounting offers simplicity and immediate cash flow visibility, but more complex practices may have regulatory or reporting compliance that requires accrual basis reporting. Before deciding which accounting method to use, it's essential to consider the specific needs of your practice, compliance requirements, and long-term financial goals. Healthcare News states that the IRS must consent to changing from accrual basis reporting to cash basis and this is seldom granted. Consulting with a financial professional or accountant can help you make an informed choice.
Our team of financial accounting experts and CPAs would love to lead the conversation on your opportunities for the future of your business. Contact us today.