Whether you’re considering an eventual sale of your home health or hospice agency in the future or considering bringing in an investor, you’ll need to be prepared to provide the agency’s financial statements to a potential buyer or investor. During the due diligence process, buyers or investors will expect current, up-to-date financial information, prepared accurately using the accrual basis of accounting. Many agencies that do not otherwise require audited financial statements typically do not maintain their accounting records fully in accordance with Generally Accepted Accounting Principles (GAAP). Many utilize the cash basis of accounting or some other hybrid of cash and accrual basis.
Under the cash basis of accounting, revenue is recorded when cash is received, and expenses are recorded when cash is paid. This method is not an accurate representation of operations and is not in accordance with GAAP.
The only acceptable method of accounting under GAAP is the accrual basis of accounting, which requires revenue to be recorded when earned and expenses to be recorded when incurred, regardless of the timing of the cash exchange. This method provides users of the financial statements with meaningful information for decision making based on true operating results.
Because preparation of accrual-based financial statements can be complicated and time-consuming, significant attention should be made well in advance of contemplating a sale or investor transaction. Furthermore, potential buyers or investors will typically require at least 12 months’ worth of historical information for due diligence review.
Some common issues found in due diligence review include:
- Lack of timely or accurate cash reconciliations
- Old uncleared/stale outstanding checks
- Inaccurate valuation of patient accounts receivable
- Uncollectible or old accounts receivable
- No consideration of an estimate for an allowance for uncollectible accounts receivable
- Unrecorded hospice cap liabilities
- Lack of an accrual for Medicaid hospice room and board expenses
- No estimate for liabilities related to self-insured risks, such as employee health insurance and workers compensation claims
- No consideration for estimated incurred but not reported (IBNR) claims outstanding under self-insured risks
- No liabilities recorded for settlements on legal matters
- Intercompany balances not reconciling
- Errors or missing prepaid expenses causing inappropriate expense fluctuations
- Unrecorded liabilities due to lagging receipt of related invoices
- Lack of an accrual for employee compensated absences
- Inaccurate or no accrual for payroll liabilities
- Inconsistencies in recording of capital assets
- Improper recording of owner expenses
Due to the challenging staffing environment, having resources with the proper amount of time and experience to accurately account for such transactions can be difficult to find or retain, so many agencies have tapped into outsourcing services to handle their accounting needs. FORVIS offers a full suite of Outsourced Accounting Services tailored to assist with each agency’s unique needs. We can help you with the back-office burden of maintaining accurate and timely accounting records, so you don’t need to be concerned with internal staff turnover in these responsibilities. We also help agencies be prepared if and/or when the day comes to consider a sale of the company or to bring in an outside investor.
If you have any questions or need assistance, please reach out to a Home Care & Hospice team professional at FORVIS.