Monday, November 23, 2009

Cash or Accrual??...... What Does This Have To Do with Babies?

There are two methods of accounting, cash or accrual. Most households use cash and large businesses generally use accrual. What does this have to do with birth issues, you may be asking? Give me a moment, I promise it will all fit.

Cash is simple! You charge a client $200 they pay you $200, you record $200 as revenue. You receive a bill for $100, you mail a check for $100 and record $100 as the expense. "Simple!"

Accrual,…. not so simple! You send a client a bill for $1000, and record $1000 as revenue, even if you have not collected any money. You receive a bill for $500 and record a $500 expense, even if you have not paid the bill yet. A little more complicated.

Try this: you send an insurance company a bill for $5000. Under the accrual system, you record $5000 as income. Three months later, the insurance company sends you a check for $1100. You must then go back and make a $3900 adjustment to revenue to reflect the transaction and balance your books.

I think you can see my point! Many smaller businesses (and larger for that matter) can get into trouble with accrual accounting. You send in those $5000 claim form to insurance companies, and you think you've made $5000. It looks really great on the books, until the check comes and you have to make accounting adjustments. I have seen many birth practices get into trouble, because it looked really good in accrual, but really bad in cash.

Very often, when the government makes projections,. they think in terms of accrual. A 10% tax increase will bring in 10% more revenue. So they accrue, the extra 10%, and then they spend it, because in government accrual accounting, you show the revenue you expect to collect and then you spend it. Then the extra 10% does not come in, because people change the way they do business to avoid paying the10%, and now the government has a budget shortfall.

When the federal government has a budget shortfall, they print more money. When you have a budget shortfall in the birth practice, you close your doors!!!

Always keep an eye on the real bottom line.


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