Have you ever thought something looked off in your financial statements? Perhaps the figures didn’t make sense or reflect how busy your veterinary clinic was. When trying to read and interpret financial information and improve profitability, practice owners often turn to their accountants or bookkeepers. However, anything they tell you can be misleading if the data is incomplete, incorrect, miscoded or entered in the wrong period.
I’ll explain how to record information in your accounting platform and which method might be better for you.
Wait and See
Ms. Johnson arrived at the veterinary clinic on a busy February day with her sick dog, Bella. Once the appointment was over, she stood at the front desk, ready to check out.
“That will be $450, Ms. Johnson.”
Bella’s owner reached into her pocket and realized she had forgotten her wallet. Sam, at the front desk, smiled and said he would email a link so
Ms. Johnson could pay when she got home. She returned home, grabbed her wallet and drove to work. Bella felt just fine after three days, and Ms. Johnson forgot about that week’s visit.
Two months later, her cat, Jimmie, was due for vaccinations, and she stood before Sam again.
“That will be $110 for today and $450 for the prior balance.”
Ms. Johnson paid in full.
Sound familiar?
This Month
Let’s explore the story from the bookkeeping perspective and follow the timeline involving Ms. Johnson.
Once Sam created an invoice for $450, the computer showed February revenue of $450. The accounts receivable report revealed a client balance of $450. Two months later, $110 in revenue from Jimmie’s feline visit was recorded when the invoice was created, and the $560 payment ($450 past due plus $110) will show in the month it was received. This method is called accrual-basis bookkeeping.
Now let’s go into your accounting platform. Was the revenue reflected the same way? An invoice in February, another in April and a payment in April?
Most online bookkeeping products support that scenario whether you use QuickBooks, Xero or something else. So, my question to you is, are you recording every invoice in your accounting platform? Or are you recording periodic revenue summaries (daily, weekly, monthly)? Perhaps your PIMS syncs every invoice and payment to your accounting platform. That is the ideal way, and your revenue is recorded on an accrual basis.
That Month
Some veterinary practices use a different method. Instead of recording invoices, the practice waits and documents the revenue when the payment is received. Once the money is in the bank, it’s considered revenue. This method is called cash-basis accounting.
What is valid for revenue is true for expenses. For example, you have a monthly $200 phone bill. In the accrual world, you record the bill each month because the expense occurred then. However, what if you forget to pay the bill for three months? In cash-basis accounting, you record the expense once it’s paid.
Why is this important? Cash-basis accounting usually doesn’t reflect financial activity within a given period. That’s because it typically doesn’t match income with applicable expenses. On the other hand, accrual-basis bookkeeping displays your clinic’s actual performance.
You can enjoy the best of both worlds by using today’s accounting software. If set up correctly, the software can accommodate the cash and accrual methods with the push of a button.
A word of caution: Many practice owners tell me their books are set to an accrual basis because the report says so. That’s not necessarily true because the software only converts from one method to another if it’s set up the right way and has all the needed information.
Once you keep your books on an accrual method, you can start exploring industry benchmarks and key performance indicators. And you can still file taxes on a cash basis despite keeping your books on an accrual basis.
The Bottom Line
Cash-basis accounting records revenue when cash is received and expenses when money is spent. An expense paid by a credit card is assumed to have been paid when charged. This method is easy to do and less time-consuming. The downside is that net income can be easily manipulated. Your accountant usually needs only bank and credit card statements to record the data.
In contrast, accrual-basis accounting records revenue and expenses when they incur, regardless of when the money was received or spent. This method is more complex. Your accountant will need every bill, bank and credit card statement and access to your practice management software. The good news is you save time and money if automation is in place.
Accrual-basis bookkeeping provides a more accurate picture of your practice’s performance.