Rebates are like door prizes practices get for showing up and doing business with the various vendors that supply us with eyewear, contact lenses, and equipment. It’s always nice to get something back after spending thousands, if not tens of thousands, of dollars with a single company.
But how should rebates be accounted for? After managing the books for well over 150 practices, we’ve seen rebates accounted for in all sorts of places on the financials or sometimes not accounted for at all. Let’s consider what rebates aren’t, how not to account for them, and why. Then we’ll discuss what they really are and how Books & Benchmarks handles rebates.
What Rebates Aren’t
1. Personal, non-business cash.
One of the more curious things owners do with their rebates is deposit them straight into their personal accounts. It makes some sense to do this since rules around the taxability of rebates can be vague (please consult your CPA on this question).
But by keeping them off the books, your Cost of Goods Sold is going to be higher. Therefore, profits will be lower. When you go to sell (or if you need to sell in a hurry), this will impact your business value. Is saving even 50% of the rebate (at the highest effective tax rates) worth potentially losing out on 4 to 7 times that amount in valuation?
2. Topline revenue (ordinary income)
Similarly, rebates aren’t revenue in the sense that they aren’t payments you receive from the ordinary activity of providing eyecare or dispensing products.
This isn’t the end of the world, because even if they’re booked as revenue, the increase in revenue will result in higher bottom-line profits. But it can throw off your calculations when you try to account for things like collections remittances or productivity calculations like revenue per exam or revenue per square foot.
3. Other income
Another common place for owners to book rebates is “Other Income,” which falls below the line of Ordinary or Operating Income. While rebates aren’t your typical revenue generated from patient payments, they do come from ordinary practice activities like buying materials to dispense to patients or adding equipment.
Delayed Discount
The best way to understand rebates is as a “delayed discount.” Most practices have negotiated discounts with their vendors either directly or through an alliance like IDOC (check it out if you’re not a member!).
Rebates are effectively an additional discount vendors offer, usually for hitting volume targets (shipping more business to a single customer makes the manufacturer’s operation more efficient) or occasionally for other behaviors like keeping returns low or dispensing a high share of certain brands.
That’s why Books & Benchmarks categorizes vendor rebates as a credit (a negative expense, if you will). If you want your financials to reflect the actual revenue and expenses of your practice, booking rebates is the way to go.
To learn more about how Books & Benchmarks makes life easier for practices—or even their CPA firms—by producing accurate, timely, and meaningful financial statements and reports, contact us today.
