How Much Are Accounts Receivable Costing Your Practice?

Is your dental practice carrying excessive accounts receivable? In this guest blog post, "Dental Accounts Receivable Ninja" Andy Cleveland, along with Fortune Management's Jon Harris, offers tips on how to improve your cash flow.

‍I consult with practices all across the country, and there are plenty of reasons why a practice may carry accounts receivable.

From not fully embracing a culture of prepayment to improperly estimating insurance, they run the gamut. And then there's always the potential for a lack of proper training and motivation of front desk teams.

If you have too much accounts receivable on your books, then you're not realizing the profits of your hard work.

Carrying some accounts receivable is healthy — ideally when properly managed with automated credit card payments and bank drafts. It can help patients accept treatment and create predictable production in future months.

On the other hand, if you carry too much accounts receivable, especially if its unsecured, your cash flow suffers. You run the risk that a large portion will go uncollected, thus hurting your profitability.

It's important to have a balanced approach based on the idiosyncratic factors in your business.

Some factors to consider include:

• Current stage of ownership—Start-up versus established practice
• Business model—Fee for service versus PPO-driven
• Socioeconomic status of patient base
• Your comfort level with risk

Carrying between half a month and a full month’s average production on your books is generally considered within normal limits.

However, most often it’s the owners comfort level that supersedes the simplicity of this rule.

For example, if you run a million dollar practice you would want no more than $41k-83k owed to you over 30 days. Though if you are heavily into orthodontics, this number may be unduly low; however if you are an oral surgeon or endodontist then this number is most likely too high.

According to SIKKA software, a fantastic analysis tool that works seamlessly with most practice management softwares, accounts receivable rose for five consecutive years, from 2011-2016. So if your dental practice is carrying excessive accounts receivable, the good news is that you're not alone.

Here are five costs of carrying too much accounts receivable, along with the proper adjustments your practice can make.

Costs of Carrying Excessive Accounts Receivable

1. Fiscal Cost

There is an out-of-pocket cost associated working your own accounts receivable, no question. You are spending money on electronic statements, paper, toner, postage, certified mail and long-distance charges.

It’s common for many practices to continue to spend money in vain when trying to collect patient balances that have little (if any) hope of recovery.

For example, let's say someone owes your practice $25. Realistically, it makes little sense to spend significant time and money to chase it.

And yet, many offices often do this, as they know of no other better alternative.

You need to have a reasonable assumption that you'll get a return on investment, and that your time chasing a payment was well spent.

2. Interest Income

Are you charging interest on balances over 30 days?

If you allow patients the privilege of not paying at the time of service, then are you insulating yourself from the risk of not being paid?

Credit card companies, banks, student loans, car leases, and mortgage lenders all charge interest. And, yet, dentists often do not!

The good news is that if you start, most likely, your patients won’t even notice or care.

If, for example, you charge 1.5% interest per month and you carry 100k in accounts receivable, then you've just increased your fee income by 18k a year!

That's enough money to bring on a new part-time team member!

3. Inflation

Like death and taxes inflation is a fact of life.

Everything is worth less today than it was yesterday.

According to Inflationdata.com, your average cost of goods increases every year by around 1.9%. And while seems relatively innocuous, its insidious effects, when compounded over the life of your practice, is significant.

If you want perspective, think about how much cheaper a gallon of milk, gas, clothing cost only 10-20 years ago. Now think about it in terms of all the things you need to run a practice.

Essentially, if a patient pays you in six months that money is worth less than if they had paid today.

4. Depreciation

According to the U.S. Department Of Commerce, your patient accounts becomes less valuable at a rate of ½ of 1%!

The clock starts ticking the minute your patient leaves your office, and that's regardless of their reason for non-payment.

Any best practice you can institute—whether delivering proper insurance estimation, giving a discount for prepayment, or using third party financing—can have a profound impact on your bottom line.

5. Opportunity Cost

Is your staff is spending time, effort, and frustration chasing money that you already earned?

How much is this distracting them from doing activities that are a better use of time?

Could they be working on insurance follow up? Marketing your practice to the community and attracting more new patients? Following up on all those unaccepted treatment plans?

Given the increasing complexity of running a dental practice, almost anything is more profitable than chasing your own accounts receivable.

A proud member of ADMC and AADOM, and featured in Dental Town, Dentistry IQ, and The Profitable Dentist, Andy Cleveland has been in the Patient Revenue Cycle space for 20 years. He can be reached at his website, AndyCleveland.com‍

Learn more about how RevenueWell improves case acceptance and creates more close-knit relationships between dentists and their patients. Or download our ebook on how to grow your practice this year!