Unless you generate $5 million or more in revenue, maintain an inventory, and/or are a corporation (not an S corp), you have a choice. You can record your business transactions using the "cash" or the "accrual" method of accounting. Do you know which is right for your practice? What are the pros and cons of each method?
There are many dental offices that choose to use the cash method. It is the more simplistic method and can be done with a single entry system. Sales or services are not recorded until payment is received and expenses are not recorded until payment is made. Because of the simplicity of the cash method, a dentist might even choose to do the books him/herself. Also, you, the dentist, will easily be able to know what the cash flow is. Exactly what funds are available at any given time.
So why would you use the accrual method of accounting? It is much more complicated. How would you integrate the information from your dental software, such as Eaglesoft or Dentrix? Would you need a full time bookkeeper? Could this system be easily manipulated by someone? What about your cash flow? Will you still be able to see that? These are all good questions and will be addressed, but first let's look at what you, the dentist are missing out on by not using the accrual method.
First, if your books are done by the accrual method, they give a better understanding of what your business is worth. The balance sheet will be more complete as far as reporting assets, liabilities and the amount of stockholder equity. You will have the big picture of what your bottom line is.
Secondly, it can project revenue and spending more accurately. It records revenue and expenses in real time. This will allow you to create a budget and avoid overspending. This can also help to plan for future issues. Maybe a time during the year when expenses are higher or production is lower, the budget can allow for this. It can also show if the practice is producing but collections are not keeping up.
Thirdly, an accrual method of accounting can identify areas of improvement and hidden opportunities. Since the accrual method of accounting is the acceptable form in GAAP (generally accepted accounting principles), comparisons with other dental practices like yours can be made. This is called Benchmarking. Benchmarking can show you the percentage that other dentists are spending on their expenses and how they are becoming profitable.
Lastly, it will give you insight to plan for the future. The accrual method will help you to determine if you are able to do improvements to your office, take on more staff or even open a new location. The accrual method will allow financial reports to be created for you, investors, and lenders, which will be essential.
So what about the challenges mentioned earlier with using accrual? Yes, it is more complicated, but a good bookkeeper can simplify and make it easy for you to understand. Your dental software, such as Dentrix or Eaglesoft information can be integrated with an app or simple journal entries that your bookkeeper can handle. If a bookkeeper is just handling your books, you should not need one full time in your office. Actually, I recommend that you have your bookkeeper as an outsider. Someone handling the books and money can manipulate things, so they should never do both. An outside bookkeeper is an extra pair of eyes that can help implement internal controls, (Another subject for later) .
Finally, if you have a great bookkeeper, he or she will be providing you with a minimum of three financial reports monthly or quarterly. In these will be included a SOCF (statement of cash flow). This report will allow the dentist to know where the cash is going and what is available, just like the cash method does.
So if you are interested in having insight to long term profitability, I would choose the accrual method of accounting. Also, choose a bookkeeper that is interested in helping you build a healthy, more prosperous practice with this method.