Accrual vs. Balance Accounting: A Brief Overview
Before we delve deeper, let’s understand the basics.
Cash accounting, or balance accounting, is like a financial diary, recording transactions when cash changes hands. It’s straightforward but can be misleading in terms of a business’s health. For instance, if a client pays upfront for a package of treatments, cash accounting would record the entire payment as revenue at the time of the transaction. This could misleadingly inflate the medspa’s financial health in that period.
Accrual accounting, on the other hand, is more like a financial novel. It records revenues and expenses when they are earned or incurred, not necessarily when cash is exchanged. This approach offers a more accurate and comprehensive view of a company’s financial status. For example, when a client purchases a package of multiple treatments, with accrual accounting, the revenue from this package is recognized progressively as each treatment is provided, not when the package is purchased. This approach aligns earnings with service delivery, offering a realistic view of income across different periods.
Gift cards are another area where accrual accounting shines. When a client buys a gift card from a plastic surgery practice, cash accounting would immediately record this as revenue. However, in accrual accounting, this purchase is treated as a liability. The revenue is only recognized when the gift card is redeemed, and services are rendered. This method acknowledges the obligation of the practice to provide services in the future, maintaining a more accurate record of financial obligations and health.
Why Accrual Accounting Appeals to Equity Firms
So why is accrual accounting appealing to equity firms? And why is it important for you as a plastic surgery or medspa practice?
- Comprehensive Financial Health View: Accrual accounting provides a holistic perspective of a company’s financial health. Equity firms value this as it allows them to assess the real-time profitability and prospects of a business.
- Consistency and Comparability: Accrual accounting aligns with Generally Accepted Accounting Principles (GAAP), which is required for US public companies when compiling financial statements. It makes your finances more standardized and comparable across different companies and industries.
- Better Revenue Recognition: This accounting method allows for more accurate revenue tracking, which is crucial for aesthetic offices where services may be rendered over a period.
- Forecasting and Planning: Accrual accounting aids in better financial forecasting and planning, a critical aspect for equity firms looking to gauge long-term growth potential.
- Planning Your Future: As a practice your objective is likely to eventually sell your practice and retire, and private equity is where you will cash in!
Best Accrual Accounting Practices for Aesthetic Offices – And how Symplast can help!
To make your aesthetic office more attractive to equity groups, consider these best practices:
- Timely and Accurate Record-Keeping
- Implement systems that ensure transactions are recorded when services are performed or expenses are incurred, not when payments are made or received.
- Symplast offers the transaction reconciliation report and credit report which offer snapshots into total unearned revenue at any given date. The Patient Credit Report will show all deposits or credits on all patient accounts up to today’s date for all time and the Transaction Reconciliation report allows you to filter for specific date ranges. These in combination give an accurate record of all your practice transactions.
- Conduct monthly reviews of your financial statements to monitor the business’s performance and address any discrepancies promptly.
- With the Symplast financial reports, you can easily and quickly conduct reviews to monitor your financial data to monitor performance and trends.
- Understand Deferred Revenue
- For services that are paid in advance, recognize the revenue only when the service is actually performed. This aligns your earnings with the actual provision of services.
- When processing payments, Symplast only tracks revenue once it has been performed to align your earnings with your provision of services.
- Manage Accounts Receivable Efficiently
- Keep a close eye on your accounts receivable to ensure timely collection of payments. This reflects operational efficiency and financial stability.
- Using the financial module in Symplast allows you to monitor your accounts receivable to make sure you receive payments accordingly.
Switching to or maintaining accrual accounting practices is a long-term strategic move for aesthetic offices eyeing equity firm investments. It’s not just about keeping books; it’s about presenting a business narrative that is both reflective and attractive to potential investors. By utilizing Symplast and its accrual accounting methods, watch your aesthetic office become a robust option for equity firms seeking promising and well-managed ventures.