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Busy clinics often fail to give a high
priority to managing their accounts receivable. This can
be a costly mistake, because overdue accounts deprive a
clinic of the funds needed to pay ongoing operating
expenses. If not attended to, bad debt will rise and
eventually need to be written off, which may seriously
threaten the program’s success. Fortunately, there are
techniques available to help the business office staff
manage the Accounts Receivable function. To understand
those techniques, it helps to be familiar with the
following terms.
Accounts Receivable
Unpaid invoices for services provided
Accounts Payable
Bills that are owed by the practice for products or
services received
Average Daily
Revenue (ADR)
ADR = Total Revenue / 360
Average revenue billed per day, determined over a
one year period
Average Days
Outstanding (ADO)
ADO = Total Accounts Receivable / ADR
Average number of days that customers take to pay
their bills
Aged
Accounts Receivable Schedule
List of accounts by number of days payment is
outstanding
Receivable
to Revenue Ratio
Amount of revenue uncollected compared to the revenue
billed
Evaluating Current Status
You can use the following calculations
to evaluate the current status of your Accounts
Receivable. This will be useful in determining whether
your organization needs to take corrective action. If
your organization has multiple clinics, this exercise
should be performed for each location.
Begin by calculating the Average Daily
Revenue. (This calculation compensates for the
seasonality of revenue experienced by some practices.)
Take the total annual revenue and divide by 360 days to
determine Average Daily Revenue (ADR). For example, if
the total revenue booked for the year 2002 was
$1,080,000 then ADR = $1,080,000/360 days, or $3,000
/day.
The Total Accounts Receivable is
determined by the amount of credit sales billed. The
Aging Report shows amounts billed and the time elapsed
since billing. The Aging Schedule is usually divided
into monthly (30 day) periods, with sections displaying
amounts overdue for periods of 60, 90, 120, etc. days.
Receivables due 30 days or less are generally considered
"current."
The Average Days Outstanding (ADO) can
be determined by taking the total outstanding revenue
from the aging report and dividing it by the Average
Daily Revenue (ADR). If the organization has a total
Accounts Receivable of $330,000, the ADO =
$330,000/$3,000, or 110 days.
In this example, it is taking an average
of 110 days or almost four months to collect for
services provided. The practice may need to obtain money
from other sources to pay their expenses during this
period. Furthermore, the length of time an account is
outstanding increases the possibility that the account
will need to be written off as bad debt.
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Evaluating Customer Behavior
You can evaluate customer payment
behavior using the Receivables to Revenue Ratio. At the
end of a quarter, the outstanding dollars from each
month’s sales is divided by the sales amount for the
month. If these amounts do not vary from quarter to
quarter the customer payment behavior is not changing
and seasonality of services provided could cause a rise
in the Accounts Receivable amount. Increased sales
cause the ADO to increase and decreased sales cause the
ADO to decrease. This occurs without any change in
customer payment behavior. If, on the other hand,
revenue remains constant and the Receivables to Revenue
Ratio is increasing then customers are taking longer to
pay for services.
Benchmarks
Benchmarking information may need to be
extrapolated from other sources for comparison data. In
1999 Occupational Health Research conducted a survey of
Tracker readers that reported average
total accounts receivable as $804,000 with the average
number of days outstanding as 83.5. However, the
variance was wide with some respondents reporting an
average of 33 days outstanding and other reporting 149
days.1 A source reports that The Medical Group
Management Association’s goal for days in AR for
Internal Medicine and Family Practice practices is less
than 60 days.
Cost of Extended Accounts Receivable
When services have been provided and
payment has not been received, the cash flow available
to the practice to carry on operations is diminished.
This may force a clinic to borrow money at the cost of
interest or extend the period of time it takes to pays
it own bills, possibly affecting its relationship with
its creditors as well as its credit rating. Another
option is to cut back on the inventory or equipment.
None of these outcomes of a large accounts receivable
would be
necessary if the AR is evaluated and managed
efficiently.
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Corrective Strategies
If the ADO for a practice is well beyond
the goal or reasonable benchmark, corrective action can
be taken. We suggest the following options:
Billing Cycle – Initially look at
the billing cycle. Some practices bill daily for
workers’ compensation cases, others bill weekly while
some have longer periods between billings. If length of
time between billings is long, then the days outstanding
will be longer. The sooner the bill goes out the door
after the service is provided, the sooner dollars can
return to the practice.
Electronic Billing – This is a
method of quickly sending bills out to payers in
electronic format. Less time is spent preparing invoices
and, if the data were entered correctly, the payment
should be received promptly.
Clean Claims – If a bill contains
erroneous information, such as an incorrect ICD-9 or CPT
code, or lacks important information such as progress
notes, there will be a delay while the correct
information is requested by the payer. Monitor the
number of claims that are returned for inaccurate or
insufficient information as part of your Process
Improvement Program.
Posting Payments – Payments
should be posted as soon as possible after being
received in order to keep accounting records current.
Posting Adjustments – Adjustments
that are accepted should be posted as soon as the
decision is made to accept them. This will usually zero
out the balance and reduce the total accounts
receivable.
Rebilling – Outstanding balances
over fifteen to thirty days should be rebilled with the
notation ‘Balance due over [fifteen or thirty] days.’
Prompt Payment Discount – Offer
small discounts to those companies that pay invoices
within 30 days. Write off the adjustment right away on
receipt of payment.
Collection Policy – A good
collection policy sets up a collection procedure that
identifies overdue accounts in a timely manner. These
accounts must be monitored for payment or sent to a
collection agency per your policy.
Bad Debt – Based on a policy
decision, write off those accounts where payment is not
expected.
Review Credit Policy – Review the
credit policy with new clients. Monitor the payment
practices of new clients to establish their payment
patterns. Monitor existing clients’ payment practices
and determine if expensive services should be provided
to those who are always late in making payments.
Review Service Types in the AR –
Check to see if the service types with the longest
payment practices are workers’ compensation or employer
paid. Review the payment requirements for your local
workers’ compensation program.
Policies and Procedures
It is recommended that practices have a
policy that outlines how credit is extended when a new
customer signs up for services. This allows the sales
staff to clearly communicate the expectations for
payment. The policy should also make clear if approval
is required before granting discounts, and if so, who
should grant such approval.
The policy should also outline the
rebilling and collection procedures. A decision may need
to be made to discontinue services to a client who is
not paying in a timely manner. If so, reception and
customer service needs to be aware of this decision.
Summary
Evaluating the Accounts Receivable
status of an occupational health program on an ongoing
basis is key to managing cash flow for the program. If
improvement is needed, set goals and measure progress
toward those goals on a periodic basis. Communication
with other members of the team is essential to this
process.
Footnotes
1
"Survey Results: Billing and
Collections," Occupational Health Tracker, Vol
2, No 1. Available on-line at: www.systoc.com/Tracker/Spring99/Survey%20Results.htm.
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