Accrual vs cash accounting (clinic context)
Two methods for recording revenue and expenses. Under cash-basis accounting, revenue is recorded when payment is actually received and expenses when bills are actually paid. Under accrual-basis accounting, revenue is recorded when services are delivered (the economic event occurs) and expenses when obligations are incurred, regardless of when cash changes hands. For clinics with insurance AR, the choice significantly affects how financial statements represent the practice's economic reality.
Why this matters for your clinic
A clinic running on cash-basis accounting records revenue only when payers actually remit payment. This means that a month with high visit volume but slow payer payments looks worse than it actually is, and a month with slow volume but fast collections looks better. For a $5M practice with 40 days in AR, there is typically $550K or more in earned-but-not-yet-collected revenue at any given time that does not appear on a cash-basis P&L.
Accrual accounting recognizes that revenue by recording it when the service is performed and setting up an AR balance. This gives ownership a more accurate view of what the practice has actually earned in a period. It also means the balance sheet carries AR as an asset, which matters significantly for lender underwriting, practice valuation, and any transaction involving the practice's financial statements.
Most small practices use cash-basis accounting for tax reporting because it simplifies timing. But cash-basis management reporting is a different decision from cash-basis tax reporting. Many practices benefit from accrual-basis management financials even if they file taxes on cash basis. The two can coexist with proper accounting software setup.
What good looks like
GAAP (Generally Accepted Accounting Principles) requires accrual-basis accounting for most entities. IRS rules allow cash-basis tax reporting for many smaller practices. The MGMA and most healthcare financial management authorities recommend accrual-basis management reporting for any clinic above approximately $1M in annual revenue where the AR balance is material enough to distort cash-basis results.
Example
In November, a physical therapy practice delivers $280,000 in services. Payers remit $210,000 before month-end; the remaining $70,000 lands in December. Under cash accounting, November revenue is $210,000 and December revenue is $70,000 higher than it otherwise would be. Under accrual accounting, November revenue is the full $280,000 and December shows no benefit from November's activity. The accrual view gives a more accurate picture of November clinical productivity and is more useful for tracking trends.
From Sorso
One of the first things we do in a new engagement is convert cash-basis books to accrual-basis management statements. The difference in how the business looks is almost always significant enough to change how the owner makes decisions.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
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