In a previous post, we introduced the generally accepted accounting principles (GAAP) and how it helps dental practices and dental service organizations (DSOs) create clear, consistent, and comparable financial statements. These records illustrate the financial health of your business, which is critical when you’re planning to sell your practice.
In this article, we’ll take a closer look at how GAAP accounting can benefit your dental practice or DSO.
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The Importance of GAAP Accounting For Dental Practices
If you have plans to expand or sell your dental practice or DSO, GAAP and its accrual-based accounting method make it easy for buyers, investors, or banks to compare your financial statements and understand the health of your business.
Moreover, rigorous reporting allows you to identify areas of improvement so you can increase the net worth of your business. The high level of transparency helps you build trust with potential buyers and investors. You can see all your revenues, profits, loss, expenses, investments, and more, so you can invest strategically to strengthen your business’s financial health.
Here are the advantages of complying with GAAP:
Demonstrate Financial Stability
GAAP’s accrual method allows companies to report revenues that are guaranteed but not yet received. As a result, your financial statements will show a higher net worth than when you use the cash accounting method. This will make your business more valuable in the eyes of potential buyers and investors so you can command a higher price.
Predict Cash Flow and Profitability
It’s easier for DSOs or dental practices to attract buyers and investors if they have a few years of accrual-based accounting records. They can help demonstrate that you have sufficient cash flow and the ability to stay profitable. You'll have a healthier balance sheet, which is particularly important during chaotic times such as the pandemic.
GAAP rules make it possible for banks and financial professionals to compare the financial health of your practice to others in the industry to determine its creditworthiness. GAAP records also show future revenues (e.g., payments from insurance companies), which provide a complete picture of the long-term viability of the business.
Address Assets and Liabilities
Any buyer and investor will want to know the net worth of your business, which requires that you disclose all the assets and liabilities and account for depreciation. Moreover, by listing out the liabilities on a financial statement, you can address issues that could impact the value of your business in the future.
Improve Transparency and Visibility
GAAP accounting improves visibility into every aspect of your company’s financial activities. You can recognize and rectify weaknesses in the business to build a strong balance sheet. These improvements will help you boost the attractiveness of your dental practice or DSO to buyers and investors.
Get Loans and Financing
Before selling your practice, you may need to make some improvements (e.g., new equipment, IT infrastructure, and dental practice management system) so your business is more appealing to buyers and investors. A healthy balance sheet enables you to take out a loan more easily and affordably so you can make these upgrades and boost the value of your business.
Build Bargaining Power
A strong GAAP record—such as one that shows long-term cash on hand operating budget—gives you more leverage during negotiations. Besides the ability to command a higher price, you also have better options to retain management and employees or continue offering special services to current patients.
Improve Operational Cost-Efficiency
When you implement GAAP accounting in a multi-location practice or DSO, you’ll need to ensure reporting consistency and eliminate redundancy in your system. Improvements to your processes will help streamline workflows and make your operations more cost-efficient, which will ultimately increase profitability.
Implementing GAAP in Your Dental Practice
The foundation for applying GAAP accounting to your dental office or DSO is to implement the right technology solutions so you can effectively manage record-keeping across all your locations.
A cloud-based dental practice management platform allows you to record your business activities all in one place, regardless of where they happen. Centralizing your records also helps you and your accountant keep track of all the payments and transactions, so you don’t have to hunt and peck for information when you need to generate GAAP-compliant reports.
In the next post, we’ll go into details on how to prepare your practice for GAAP accounting. Stay tuned!
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