Discover the difference between cash and accrual accounting and why private practices must use both to understand true financial health and plan for growth.
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Episode 9 | Watch on YouTube
Warren Buffett said it best: understanding the difference between cash and accrual accounting is like knowing the difference between your bank balance and your actual financial health. In healthcare, where services are delivered today and payment may not arrive for 30, 60, or even 90 days, this distinction is not just academic. It is critical to survival. And according to the Harvard Business Review, companies using accrual accounting are 2.5 times more likely to secure business loans and investor funding compared to those using cash accounting alone.
In this Quick Tip episode of the Private Practice Survival Guide, Brandon Seigel breaks down both methods clearly, explains why you need to run both simultaneously, and shares how to use them together to make smarter decisions for your practice.
Cash-basis accounting is straightforward: it tracks money collected versus money spent. If you collected $1 million in revenue and spent $1 million in expenses last year, your cash-basis profit is zero. This is the method most healthcare practices use for tax reporting, because you are only taxed on money actually received. It answers the most immediate question: can we cover our bills?
Accrual-basis accounting captures the value of services performed, regardless of when payment arrives. If you delivered $2 million in services but only collected $1 million this year, with the remaining $1 million expected next year, your accrual-basis revenue is $2 million. This method reveals your actual margin, what the meat on the bone truly is, and allows you to plan staffing, investments, and growth decisions with greater confidence.
The challenge in healthcare is that accrual-basis projections sometimes do not materialize. Insurance companies recoup payments, denials occur, and timely filing deadlines are missed. This is why running both analyses simultaneously is so valuable: cash-basis keeps you grounded in reality while accrual-basis helps you plan. For practical guidance on healthcare-specific accounting approaches, HFMA's resources on revenue cycle management offer excellent frameworks for reconciling the two.
Brandon's recommendation is a quarterly analysis that tracks three data points from your EMR: charges billed, contracted value expected, and cash actually collected. When these three figures align closely over time, your revenue cycle is working. When they diverge, something in your billing, collections, or payer mix needs attention. Understanding both your bank balance and your actual financial health is how you build a practice that is not just surviving month to month, but strategically growing.
