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Managing Your Dental Practice: Cleaning Up Accounts Receivables
Which category do you fall into? Your A/R (accounts receivable, or total money owed to the practice) is:
A. Less than 1:1 with respect to one month’s collections
B. Greater than 1:1
C. You have no idea
If you are in category "A," congratulations for running a sound dental "business" -- at least from the perspective of this one parameter. If you’re in category "B," you should give serious thought to examining why you are there, and what to do to improve the situation. Of course, if you are in category "C" -- you just don’t know -- you’re living dangerously!
If you’re in "C," the first step is to run the numbers. Accounts Receivable (A/R) is the entire amount of outstanding money owed to your practice. It includes money owed by patients, finance companies and insurance companies. It should not include money that will likely never be collected.
For example, “John” has never written any bad debt off his books. He’s been in practice for about five years, and is doing incredibly well financially. Yet his practice numbers are not as meaningful as they could be if he were tending to the bad-debt write-offs. A/R, along with knowledge of production and percentage collections, can give you an indication of immediate future cash flow.
However, if you are not routinely "cleaning up" the old accounts, the information available will be less meaningful. Let’s say John hasn’t performed any write-offs in five years. He has a moderately high production and collection (for example, $720,000.00 annually). Let’s assume that 1 to 2 percent of his production will become uncollectible. Perhaps $600.00 to $1,200.00 per month -- or $7,200.00 to $14,400.00 annually.
After practicing five years without performing write-offs, he may have accrued over $70,000.00 of uncollectibles which are still "on the books." If John were in the 1:1 range of A/R to monthly collection, he should be carrying approximately $60,000.00 receivables. Yet, without proper housekeeping, his computer is telling him that he has $130,000.00 outstanding!
Try this analogy. The Boston Red Sox are slugging it out in the World Series. It’s the top of the ninth inning. The scoreboard tells them that they have a very comfortable lead of 18 runs to 3. The Sox decide to pull their starting pitcher, along with half of the other positions. It’s time to give them a rest, while allowing some of the less experienced players to enjoy a few moments in the limelight. The only thing the Sox didn’t realize was that the scorekeeper had left the prior three games’ runs build up! In reality they were trailing 3 to 1!
Monthly, we should determine which accounts are uncollectible. After 90 days overdue, they should already be at a collections agency (not my preference), or be given up as hopeless. In either case, zero the balance out. All practice management software has a code for "bad debt write-offs." What if Mary decides to pay six months later? Simple: reinstate the balance and enter the payment.
A spreadsheet program, such as Excel®, is an invaluable tool for tracking the numbers. Once formatted, simply plug in the months’ figures -- examine as many different parameters as you choose -- Excel can then graph the results. Graphed results are far more useful than raw date tables when looking for trends.
Consider setting up a single graph which compares production, collection and accounts receivable. At the bottom you should also include monthly write-offs. You may actually prefer to insert a single monthly figure at the graph’s bottom, since they will hardly blip if represented graphically. Having taken write-offs into consideration, you have now graphed a meaningful A/R.
Your reports can alert you to problems in a timely fashion -- if you read them. For example, you may see the A/R stays fairly constant (flat line), hovering around 1:1 for a number of months. Then you note a sudden sharp decline in A/R. Yes, the significant drop could mean that your staff has worked overtime calling patients and collecting outstanding balances. Or, it could just as easily indicate that your staff forgot to perform routine write-offs. Subsequently, last month they may have written off $20,000.00! Having the write-offs directly below the A/R graph allows you to easily monitor their effect.
There is yet another possible reason your accounts receivable heads downward. You may have taken a week or two off. How would that affect A/R? Simple: Collections continue to come in from patients and insurance companies, yet production grinds to a halt in your absence. As outstanding balances continue to reduce without new ongoing production, the total A/R (money owed to the practice) will decline. This isn’t necessarily good or bad. It is, however, important that you understand why it’s occurring. Without such insight, you may assume that the collections efforts of your staff have finally helped you to turn the corner on a chronic A/R problem.
So you’re tracking accounts receivable as well as monthly collections. The next step, calculating the ratio of A/R to monthly collections, is a breeze. Simply take the A/R figure and divide it by the monthly collections figure at any given point in time. I suggest calculating this on a monthly basis. For example, if John has an outstanding A/R of $60,000.00, and he is collecting $60,000.00 per month, then his A/R to monthly collections ratio is 1:1. This is an excellent target to shoot for. Once you have an understanding of where you are, you’ll better understand how to control it.
Once you’ve reached 1:1, you might examine your overall practice and decide you’d like to see an increase in production -- that is, do more dentistry. Here’s a simple and financially safe way to instantly increase your production: "Allow" your A/R to monthly collections ratio to rise to 1.2 to 1.
How and why?
Let’s examine the why first. Approach every patient who has turned down treatment solely on the basis of affordability, and offer them extended payments -- beyond whatever you’ve already offered. The extent of increased acceptance and thus productivity will be directly dependent upon the degree of generosity of your new payment policy. This isn’t rocket science. It’s simply a numbers game. You have within your practice a certain number of patients who can’t or won’t accept recommended treatment solely on the basis of affordability. A certain percentage of those patients will accept treatment when allowed to make a longer payment plan.
Now the how: to be safe, make small changes at first. Examine your current financial policy. For example, for treatment in excess of $2,000.00, a typical option for payment allows division of the total owed into three monthly payments. In actuality, the first "monthly" payment is due at the start of treatment -- so credit is really only extended for 60 days. If the A/R to monthly collections ratio has dipped below 1:1, and you want to safely increase production and collection, you may extend an additional month credit when financing.
Subsequently, from that day forward, the staff is allowed to offer "good" patients four monthly payments instead of three. A "good" patient is one who has always paid for their treatment on time, and doesn’t fail to keep appointments. Dr. Howard Farran suggests all payment plans that allow extended payments should require post-dated checks or credit card authorizations, unless unlawful in your state. Whenever a patient chooses this option, he or she writes us all of the payments, dated according to the agreement, at the beginning of treatment. The post-dated payments are kept in a "tickler" envelope and sorted by date.
If the A/R to collections ratio climbs above your comfort level (e.g., you’d like 1:1 and you’re at 1.5:1), there are several steps you can implement to bring A/R back under control.
1) Be certain that your staff understands that no patients are to be scheduled for any major treatment without a completed, written and signed financial options sheet.
2) Assign one business staff member the responsibility of examining your current receivables. Where is the money owed? Have insurance forms not been submitted or resubmitted? Have some patients not been contacted or billed if the final insurance payment left them with a balance? It’s no easy task, but someone must find the money, and then go after it.
3) Have the business staff prepare a "money sheet" every night prior to closing. The money sheet is a copy of the next day’s schedule, on which the amount owed at the visit is clearly spelled out for each and every patient. For example, they must examine each patient’s expected treatment, prior financial arrangements and current balances. What’s being performed tomorrow? What will it cost? Are we going to wait for a portion of it from insurance? What will the patient be expected to pay tomorrow toward this treatment? Is there any outstanding balance from any other prior treatments?
All of the above questions should have been asked and answered before tomorrow’s appointment was made. If, for example, insurance paid less on last month’s inlay than expected, then the patient should have already been contacted. If payment wasn’t promptly remitted, then arrangements should have been made to include the amount in tomorrow’s anticipated payment. This is only recommended if the patient has a spotless payment history.
The money sheet gives us one last opportunity to examine each patient’s account status prior to the heat of the battle. It’s far too late to start digging into account information after the treatment has been started and the patient is standing before you at the desk. Once determined (any prior balance, plus anticipated owed tomorrow), the figure owed at the time of the appointment is written in red ink on the money sheet. This sheet is taped onto the front desk, and will remain there until all of the next day’s patients have been checked out and treatments and payments have been entered into the computer. In addition, detailed notes describing how we arrived at the figure due must be left in the computer or the patient’s chart. Otherwise, a different staff member checking the patient out would not have the advantage of the previous night’s research -- patients will simply not pay what they don’t believe or understand they owe.
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