You invest a lot into building your dental practice or dental service organization (DSO). When it comes time to reap the fruit of your hard work and sell your company, you need to demonstrate the health and viability of the business.
Start with clear, consistent, and comparable financial statements to make it easy for potential buyers and investors to do their due diligence. This also helps make the financial gains of buying your practice more tangible so you can command a higher price.
Your financial reporting must describe your businesses’ financial position (e.g., balance sheet, statement of net position,) results of operations (e.g., statement of revenues, expenses,) and disclosures.
However, finance and accounting aren’t a topic most dentists learn at school. Many start their practices with a barebone accounting structure. But when you grow the practice and expand the business, it’s time to tighten up your reporting procedures.
To get your financial ducks in a row, work with a professional accountant and follow the generally accepted accounting principles (GAAP). Here’s what you need to know.
What Is GAAP?
GAAP is a set of accounting principles and procedures established by the Financial Accounting Standards Board (FASB). It’s an independent, private, not-for-profit organization that establishes financial accounting and reporting standards for public and private companies to compile their financial statements.
It combines industry standards with commonly accepted methods of recording and reporting accounting information and regulates definitions and assumptions used in accounting across all businesses and industries.
GAAP helps improve clarity, consistency, and comparability in the communication of financial information. The objective is to deliver useful information to investors, lenders, or other entities that provide resources to a company.
For example, potential buyers and investors can extract data from a company’s GAAP-compliant financial statements to facilitate the process of buying or selling a company. Even though GAAP isn’t mandatory for non-publicly traded companies, it’s highly favored by lenders, creditors, and investors. As such, most companies in the U.S. comply with these principles.
The 10 Principles of GAAP
GAAP provides guidance on what items should be reported in financial statements (e.g., assets, liabilities, revenues, expenses,) how the reported amounts are measured, what line items should be aggregated and displayed, and what information about the reported items should be disclosed.
Financial reports that adhere to GAAP are standardized and easy to understand. They can be used across various accounting practices. Meanwhile, any accounting professional can compare and understand the information to evaluate the financial status of an organization and establish uniform plans.
Implementing GAAP in your dental practice sets a solid foundation for financial reporting. Here are the 10 principles to follow:
- Regularity: Adhere to GAAP rules and regulations as a standard practice.
- Consistency: Apply the same standards over the long term to ensure financial comparability.
- Sincerity: Depict the company’s financial status accurately and impartially.
- The permanence of methods: Use the same financial reporting procedures.
- Non-compensation: Report both positives and negatives with full transparency.
- Prudence: Focus on fact-based financial data representation without speculation.
- Continuity: Assume that the business will continue to operate when valuing assets.
- Periodicity: Distribute entries across the appropriate timeframes (e.g., reporting revenues in the relevant account periods.)
- Materiality: Disclose all financial data and accounting information in financial reports.
- Utmost good faith: Presuppose that all parties act honestly in all transactions.
Implementing GAAP in Your Dental Practice
Besides working with a professional accountant, you should have all the data pertaining to your practice accessible from a centralized location. Having high visibility is particularly important for DSOs and practices with multiple offices.
For example, you can use a cloud-based dental practice management platform to ensure that all your business activities are recorded in one place, regardless of where they happen. Centralizing your records also allows you and your accountant to 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.
You'll need to invest some effort to set up your accounting procedures, but you’ll reap the benefits of having a comprehensive and accurate view of your practice’s financial health.
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