5 Ways Accrual Accounting Keeps Your RCM Healthy

5 Ways Accrual Accounting Keeps Your RCM Healthy

What is Accrual Accounting, and Why is It Important to You as a Dentist?

In accrual accounting, you record revenue or expenses when a transaction occurs, instead of when a payment is received or made. This accounting method follows what’s called the matching principle, where you record revenues and expenses in the same period.

Accrual accounting is very different from cash-based accounting, where you recognize revenue and expenses as they occur. With cash-based accounting, your statement will track how money is exchanged. Revenue will appear on your statement when you receive income in the form of cash, and expenses will show up on your statement when they’re paid.

One advantage of accrual accounting is, by including real-time accounts receivable and accounts payable on your statement, your practice can predict future cash flow and financial gains, so you can gauge your profitability more accurately.

Accrual-based accounting is the standard of bigger companies. You employ accrual accounting to create quarterly financials for comparison and a 12-month rolling period, so you get a correct financial picture of your practice.

Accurately Recognizing Revenue

With accrual accounting, it doesn’t matter when you receive payment. You recognize revenue when you deliver services. As a result, your revenue properly matches with the services you provide. Now you can match specific revenue streams with the expenses you incurred to earn that revenue. This is a great advantage to dentists, because now you can see profitability per service and treatment. With this knowledge, you can assess how you want to price specific services, and you can determine how you want to promote your services.

Recognizing Expenses in a Timely Fashion

With accrual accounting, you recognize expenses such as salaries, supplies, rent, and utilities when you incur them, not when they’re paid. This gives your dental office a clearer view its profitability and financial health.

Accrual accounting is also a big help to dentists regarding inventory management. If you recognize an inventory item’s expense when it’s used, instead of when it’s purchased, you get a better idea of how much each item costs and of your current inventory levels. As a result, you can better forecast your supply needs, keep from overstocking unnecessary items, and see to it that all your inventory costs are accurately reflected on your financial statements.

Managing Billing and Accounts Receivable

Accrual accounting helps in efficiently managing billing and accounts receivable. You record services provided to patients as accounts receivable, even if you haven’t received payment yet. Consequently, your dental office can track outstanding payments and follow up with patients or insurance companies to ensure timely collections.

Budgeting and Financial Planning

With accrual accounting, you get more accurate financial data, which is essential for budgeting and financial planning. You can feel more confident about planning for future expenses, hiring new staff, or making significant investments, because you’ll know you’ll have the capital to fund these moves. Since your dental office knows when revenue is expected to be received and expenses incurred, you can create realistic budgets and forecasts to guide decision-making and promote financial stability.

Complying With Accounting Standards

Accrual accounting guarantees compliance with such internationally accepted accounting standards as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). This makes financial reporting transparent and consistent, which is important for building trust with investors, lenders, and regulatory agencies.

Accrual accounting and its compliance with GAAP and IFRS is crucial if you’re looking to sell your dental practice, merge with another firm, or seek investors, because investors prefer GAAP financial statements, which reflect consistent financial results. Outsiders will know quickly if your practice is financially stable, regularly profitable, or increasing in profitability. 

Accrual accounting can also give you reliable financial information to act on if you’re trying to make decisions about hiring staff, adding or renovating locations, investing in new technology, growing your business operations, funding more staff training, or making decisions about compensation.

Since accrual accounting gives your dental office a transparent and accurate record of its financial transactions, you can manage cash flow, analyze your profitability, and make informed business decisions to support a healthy revenue cycle.

At Medusind, we have CPAs experienced with healthcare on staff, and we’re masters of accrual accounting. We’d be happy to share our expertise and show your how our specialized financial knowledge in the healthcare field can give your dental practice the success and profitability it deserves.

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