When valuing an Orthodontics Practice, two important considerations need to be made:
- Accounts Receivable.
- Accrual versus Cash Basis Accounting.
When valuing an Orthodontics practice, especially if it is a startup and less than 2 years old it is important to consider Accounts Receivable in the valuation equation. For instance, when valuing an orthodontics practice, they typically have AR that can stretch out 24-30 months. If you are using cash basis financials, it is important to subtract out beginning AR and add in ending AR to gain a true reflection of actual revenue
Calculation from Cash Basis Accounting to Accrual Accounting is as follows:
Cash Basis Cash Flow $400,000 $400,000
Add: Ending AR $375,000 $375,000
Less: Beginning AR ($179,000) ($179,000)
Equals Accrual Basis Cash Flow $596,000 $2,096,000
Adding back the change in Accounts Receivable to Cash Flow and Revenue reflects a more correct picture of Cash Flow and Revenue. Orthodontics practices are unique due to the fact that their AR may stretch out for 2-3 years, so it is an important consideration to make when valuing an Orthodontics practice.