Content Dam Diq Online Articles 2016 02 Revenue 1

Few dental practices define ‘revenue’ the same way. This can lead to financial confusion

Feb. 15, 2016
Some financial terms that dental practices may take for granted can actually be interpreted very differently by different people, leading to confusion regarding the practice's finances. One is "revenue."
Revenue. Production. Collections. Income. These should be familiar terms to anyone in any industry. But oddly enough, these terms take on different meanings after speaking with hundreds of people in the dental industry.

Often times not understanding a definition can lead to confusion. For example, people may believe calculations are incorrect regarding commissions, bonus payments, dentist “earn-outs,” or multi-practice financial comparisons. This confusion can lead to misguided strategic decision making or incorrect data comparisons (i.e., comparing apples to oranges).

Additional terminology that may contribute to confusion may include:
• Gross vs. Net
• Book vs. Tax
• Accrual vs. Cash
• Receipts vs. Sales
• UCR vs. Insurance Carrier Rates
• Production Adjustment vs. Collection Adjustment

Here I will focus on “What’s the true definition of revenue?”
My first thought while researching this topic was to go to what is probably the highest authority—the IRS (Internal Revenue Service). Searching revenue on the IRS website infuses ambiguity. Ironically, line 1a of Form 1120S (the most recognized tax form by dentists) reads “Gross Receipts or Sales.” In the same section you’ll find the terms profit, gain, and income. You won’t find the word revenue.

ALSO BY TODD RINCON:Are dental practice financial statements akin to bite harmonization?

Depending on who you ask from company to company, or even internally in the same company, the definition is confused. Sometimes even among the highest level executives within the same company the term revenue takes on different meanings. Some believe revenue is the practice’s production. They confuse it with gross or net production. Others believe collections (payments received) constitute the definition of revenue. If your practice accepts insurance, your records will contain accounts receivable. Some revenue will use accounts receivable, or the change in accounts receivable, to determine revenue.

One well-known revenue calculation example is—Collections (minus) Refunds (plus or minus) Change in Accounts Receivable (equals) Revenue.

I recently observed another example of the industry’s confusion of the definition of revenue in a proposal prepared by a capital investment company. The proposal outlined a multi-million-dollar investment that contained a forecast schedule where revenue was equal to gross production. The company receiving the proposal calculated revenue differently. This misunderstanding resulted in possible internal revenue disputes arising from billing of production, insurance payments, adjustments, and more.

So what is the true definition of revenue?
At this point, the definition of revenue should be clear. There is NO true definition. Revenue is defined differently depending on who you ask. Remember this when revenue has a direct or indirect effect on your financial interests. If you don’t know the definition, ask for clarity.

For more information, refer to Parts 2 and 3 of my article, Considering Selling Your Dental Practice?
Click here to read Part 2

Click here to read Part 3

Todd Rincon is the former Director of Accounting Operations and Finance Lead for Acquisitions and Transitions for a large DSO. He advises dental professionals, dental groups, and investment groups with a variety of practice scenarios including all phases of a practice purchase or sale, including post-acquisition. Todd uses his unique insight, pragmatic approach, and understanding of the DSO Model with each project.