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Healthcare professionals are, unfortunately, very accustomed to delayed payments. You provide quality and timely healthcare service to your patients, and then you wait....and wait....and wait...to be remunerated. It doesn't change when you evolve into a healthcare entrepreneur. Delayed payments will come from every corner of your business. Your investors (current and future) need to know how and when you receive revenue and pay your expenses. Let's look at some of the common payment-related events that you'll experience and how to document them into your financial statements.
An introduction to the T-account
The basic record keeping that every entrepreneur needs to know are the debits and credits of the T-account. T-accounts are your running record (in realtime or close to it) of the business transactions that you make.
T-account: you'll have one for each account →
The way in which you record your transactions in the T-account will let you know what:
has happened,
will happen, or
you've forsaken will ever happen.
Let's walk through common scenarios you'll encounter and learn how to translate them into a T-account.
Scenario 1: You've paid for supplies and you've taken possession of them
This scenario is a typical one. You get supplies delivered to your place of business once you've ordered (and paid) for them.
This is easily reflected on your T-account: cash goes out and you take possession of the inventory.
You'll note that dates are not needed. The pairing of a cash amount leaving (credit) and the identical $ amount entering as inventory (debit) indicates that the transaction has been completed.
When you are ready to close out your T-accounts and aggregate your transactions, these two accounts (cash and inventory) will be represented in your balance sheet.
Scenario 2: You've paid for the supplies and you haven't taken possession of them
In this case, you've paid for a business-essential resource that has yet to arrive. Your investors and you will need to know that you've made this strategic decision. The loss of cash (credit) was not due to an error or bad luck, but rather a voluntary decision to make a necessary purchase.
Why do you need to indicate "prepaid inventory" as an intermediary step, when, ultimately, you will have a credit of cash ($x.xx) and a debit to inventory ($x.xx)? You're investors need to know that you're operating your business with less inventory than you needed. The inventory account tells your investors what you have with which to make sales. Prepaid inventory tells them that you've expended cash for inventory that hasn't yet arrived - and thus, can't be used to generate sales revenue. This type of reporting level-sets the expectation of your investors
Scenario 3: You've received inventory but haven't paid for it
In this case, you've received a resource and have the obligation (liability) to pay for it. Your investors need to know that you increased your liabilities for some of the resources that you are using.
Once you're able to pay for the inventory, your liability (accounts payable) decrease and your inventory asset increases by the same amount.
Scenario 4: You provide a service and receive payment for it on the day of service
This situation rarely happens in clinical care, but an increasing number of healthcare entrepreneurs are requesting/demanding payment upfront before they render a service. Collecting payment upfront means you've earned revenue for the service you've provided. It also means you're not subject to the risk of not receiving the payment in the future, the risk of receiving a lower sum than what you earned, or the risk of devaluation due to inflation.
Scenario 5: You provided your service and haven't received payment
This scenario is one in which nearly all healthcare professionals have experienced. It is the most common way the transaction cycle ends - when you provide your patient-client your service and they exit without having reconciled the bill. Both you and your investors need to know that revenue is owed.
If you ignore to record the transaction, your investors will think that you aren't as busy as you truly are. If you record the transaction as if you've received the cash, you're investors will think you have more assets at your disposal to use than you truly do. Both you and your investors will make financial and/or investment decisions based on the amount of revenue you earn and the assets you have; so you can imagine how important it is to be accurate with record keeping.
Scenario 6: You've received payment ahead of schedule - your patient-client has yet to see you and receive your service
Say your patient-client books a time with you and pays the full price upfront. You've collected the cash, but haven't provided the service yet. As a result, you can't really claim that you've earned revenue because you haven't provided the service. Instead, you've made a promise to your patient-client that you will provide the service now that s/he has paid for it. That promise is an obligation, and obligations in the financial accounting world are liabilities.
Deferred revenues are liabilities - promises that you will provide a service (or product) to the patient-client because they've already paid you. Once you provide the service, the liability (deferred revenue) is reduced and you increase your service revenue (which shows up on your income statement and alerts your investors that you are moving your business along).
Scenario 7: You've provided the service and are waiting for the payment. You wait for months and nothing comes. You've given up hope of getting paid.
This scenario sounds far-fetched but it is, unfortunately, all too common in healthcare. Some patient-clients simply don't pay.
When you provide the service, you've done what is needed to earn the revenue - and that shows on your income statement. Since you weren't paid on the day of service, you note the pending payment as an accounts receivable. However, after waiting months-on-end, you've pretty much given up hope that you'll receive that payment - and thus, you reduce your account receivable. Since you provided a service for free, you've actually incurred an expense - the expense of all the time and materials needed to provide the service. That effort is recorded as the writeoff expense.
This scenario is one in which your revenue is ultimately negated by an expense of equal amount. Both you and your investors need to know how much you've written off - high writeoff expenses can indicate poor planning on your part. Perhaps you need to change your billing practices (and take the payment upfront), or increase your aggressiveness in converting accounts receivables to cash.
These are seven (7) common scenarios that you'll undoubtedly experience as a healthcare entrepreneur. Let us know your questions by using one of the communication methods below.
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