Cash Versus Accrual Accounting: Which Should Your Veterinary Practice Use?
Veterinary practice finances are more complex than many practice owners and leaders realize, but they can be tracked in more ways than one. Most practices use cash-based accounting, which is simple and approachable, but may be holding you back. Our team recommends accrual-based accounting, which works well for veterinary practices, but requires specialized knowledge and skill.
So, what’s the difference? In short, cash-based accounting tracks money in and out as each transaction occurs, while accrual accounting records expenses and income when generated, even if the money hasn’t yet moved. So, what does that mean for you? Here’s why the VetBooks team, along with most other veterinary accountants and bookkeepers, are fans of the accrual method, and how this method affects your practice’s financial health.
1. Accrual accounting accurately represents practice finances
In cash-based accounting, you record transactions only when cash changes hands. With accrual accounting, revenue for a service in December that you don’t receive until January is recorded in December when the income was earned. This approach, together with a similar process for expenses, more accurately represents your books.
2. Accrual accounting follows the matching principle
The matching principle ensures that revenue and the expenses associated with generating that revenue are recorded in the same month, which show your true profit margins. Here’s an example: If you stock up on parasiticides in the spring, because your rep gave you a great deal, you could spend $30,000 on a purchase that should last several months. With cash accounting, that bill hits your books in the month of purchase, despite the fact that you’ve had no chance yet to sell the product. With accrual accounting, that $30,000 expense is recorded on your balance sheet as inventory, and each sale is recorded on your income statement, providing a clearer profitability picture
3. Accrual accounting allows for a comprehensive financial analysis
Cash-based accounting tells you how much you have on hand right now—like checking your bank balance. Accrual accounting lets you assess current and future cash flow by accounting for unpaid bills and pending income. With a complete financial picture, you can more easily plan for the future.
4. Accrual accounting facilitates better decision-making
Accurate, timely revenue and expense information allows you to make better business decisions. With cash accounting, you likely know your true profitability only after you wrap up the year. With accrual accounting, you can understand your profitability in close to real time, which helps you make adjustments as you go. Do you have enough funds to hire a new team member or buy that expensive equipment? Accrual accounting gives you accurate projections.
5. Accrual accounting leads to more meaningful financia
Wildly inaccurate financial statements don’t mean much. Accrual accounting generates statements that reflect your economic reality, allowing you to analyze trends and measure performance against industry benchmarks.
6. Accrual accounting allows for better cash flow management
Recording income when it’s earned and expenses when they’re incurred can help you predict future cash flow, ensuring you have enough on hand for large upcoming expenses. Are you saving for a new equipment purchase, renovations, or expansion? Accrual accounting gives you the information you need to pull off your plans.
Is accrual accounting right for your practice?
Accrual accounting isn’t right for every veterinary practice or situation. Accrual accounting is considerably more complex and time-consuming than a cash-based system and typically requires help from an accounting or bookkeeping service. However, the long-term benefits of better understanding your practice financials may be worth the short-term transition to a new system.
Want to learn more about accrual accounting and how our VetBooks team can help? Schedule a meeting with us to get started.
