Cleinman Performance Partners Weekly Message

Achieving Accurate Financial Data – March 14, 2024

At Cleinman Performance Partners, our consulting work, just like your eye exam, begins with data. In our case, the data we first seek is that of practice’ financial performance. Unfortunately, most optometrists simply don’t maintain good financial data. Here’s why!

You likely operate your business using cash-basis accounting. This means that revenue is recorded when you receive it and expenses when they are paid. I call this management by check book balance. If you have cash in the bank…you’re good…not! Cash basis accounting seems simple, but this method skews your financials so badly that you don’t really know what’s going on in your practice. Allow me to explain.

Mrs. Jones comes in for an appointment in May and pays a $10 co-pay for her VSP exam. You then file a claim to VSP for the exam and eyewear which is paid by them in June. Under cash-basis accounting, you recorded the co-pay in May, but the balance of the transaction wasn’t recorded on your Income Statement until June, when you receive your payment from VSP. Likewise, the other side of the transaction, your so-called cost of goods, was actually recorded last December, when you acquired the frame that the patient now buys. And the lens expense was recorded in the month following the patient delivery when you paid your lab. Thus, this simple transaction has been recorded in two separate years and in four separate months. How can you understand what’s really happening in your business with this kind of accounting?

Cash basis accounting ignores the pile of unpaid bills on your desk and the draw full of unfiled claims sitting with your insurance coordinator. Cash basis accounting doesn’t record the cost of goods, but simply the cost of purchases. A cash-basis Profit and Loss statement tells you almost nothing about what’s really going on in your business. The use of cash-basis accounting can be traced to many of the financial challenges that we come across. In a word, for businesses that have inventory and accounts receivable, cash basis accounting is a prescription for disaster…or at least financial ignorance.

Accrual accounting records transactions when they are incurred. Thus, using the above example of Mrs. Jones, you’d record the sale when Mrs. Jones committed to the purchase. And you record the actual cost of goods in the month that you sold the product to Mrs. Jones. This does require double-entry bookkeeping, but with the likes of QuickBooks, that’s not difficult. On the revenue side, let’s assume that Mrs. Jones spent a total of $500 with you. You’d record the $500 as a sale, with the co-pay recorded as cash received and the balance as accounts receivable. On the cost side, you’ll record your cost of goods as the product is ordered.

While seeming complex, accrual basis accounting is really simple. You record based on the date of invoices.
Your resulting Income Statement shows the actual revenue and costs associated with that month’s revenue. Purchases of inventory go on the balance sheet, as do receivables. As a result, you’ve far better information with which to understand the performance of your business.

Now, your accountant may argue that you shouldn’t file your taxes on accrual basis…and they’d be right. But the beauty of using a program like QuickBooks is that you can toggle between cash and accrual accounting. Moving from accrual to cash simply requires backing out your payables and receivables. It’s an easy task that your accountant will have no problem handling.

Having timely and accurate financial information is doubly important in an era of high inflation. Knowing the true performance of your business is mission critical…you don’t want to be fooled by the balance in your checking account.

At Cleinman Performance Partners, we’ve spent decades researching and understanding how optometry practices really work. If you’re feeling the pinch of inflation, perhaps it’s time for us to chat?

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