Accounts Receivables Nightmare
From .8:1 to 1.75:1 in one not-so-easy lesson

Dr. Orent, a 1982 graduate of Tufts University School of Dental Medicine, was a founding member and has served as President of the New England Chapter of the American Academy of Cosmetic Dentistry. He lectures internationally with 1000 Gems Seminars TM, which he created in 1988, and has authored numerous articles and books on topics ranging from Esthetic Dentistry and Practice Management to TMJ. He originated Non-Orthodontic Alignment of Malposed Teeth (NOAT). Dr. Orent practices Esthetic Dentistry in Framingham, Massachusetts.

*For a free copy of Dr. Orent's financial options sheet, send a self-addressed stamped envelope to Dr. Tom Orent, 1000 Gems Seminars & Gems Publishing USA, 12 Walnut St., Framingham, MA 01702. Be sure to indicate “financial options.” To receive a complimentary copy of the 1000 Gems Newsletter, call 888-880-GEMS, fax 508-879-4811, or email orent@1000gems. A cassette tape entitled “Show Me the Money!” is also available. For more information on 1000 Gems Seminars, visit their Web site at www.1000gems.com.

Into which category do you fall? Your accounts receivable (A/R, 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’re living dangerously!

If you have no idea how much money is owed to you, the first step is to run the numbers. A/R includes money owed by patients, finance companies, and insurance companies. It should not include money that likely will never be collected.

I recently learned that a friend of mine (I’ll call him 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, were he tending to the bad debt write-offs. A/R (along with knowledge of production and collections percentage) 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. In John’s case, he hasn’t performed any write-offs in five years. He has a moderately high production and collection (for example, $720,000 annually). Let’s assume that 1% to 2% of his production will become uncollectable, perhaps $600 to $1,200 per month, or $7,200 to $14,400 annually. After practicing five years without performing write-offs, he may have accrued over $70,000 of uncollectables that are still “on the books”! If John was in the 1:1 range of A/R to monthly collection, he should be carrying approximately $60,000 receivables. Yet, without proper housekeeping his computer is telling him that he has $130,000 outstanding!

Try this analogy. The Boston Red Sox are slugging it out in the World Series. (I live near Boston, but apparently don’t follow baseball.) 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 up! In reality, they were trailing 2 to 1!

Monthly, we should determine which accounts are uncollectable. After 90 days overdue, they should be at a collection agency (not my preference), or 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 the patient decides to pay six months later? Simple—reinstate the balance and enter the payment

Tracking the Numbers
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) and Excel can then graph the results. Graphed results are far more useful than raw data tables when looking for trends.

Consider setting up a single graph that compares production, collection, and A/R. At the bottom also include monthly write-offs (you may actually prefer to insert a single monthly figure at the bottom of the graph since they will hardly blip if represented graphically). Having taken write-offs into consideration, you now have a meaningful A/R.

Your reports can alert you to problems in a timely fashion—if you read them (more on that later). For example, you may see that 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 affect.

There is yet another reason your A/R heads downward. You may have taken a week or two off. How would that affect A/R? Collections continue to come in from patients and insurance companies, yet production grinds to a halt in your absence. As outstanding balances reduce without new ongoing production, the total A/R 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 collection efforts of your staff have finally helped you to turn the corner on a chronic A/R problem.

So, you’re tracking A/R 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 and he is collecting $60,000 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—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 1.2:1. 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/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, one of our typical options of payment for treatment in excess of $2,000 allows division of the total amount owed into three monthly payments. In actuality, the first “monthly” payment is due at the start of treatment—so we are really only extending credit for 60 days. If my A/R to monthly collections ratio has dipped below 1:1, and I want to safely increase production (and collection), I’ll extend an additional month credit when financing.

Subsequently, from that day forward (until such time as I choose to change the policy again), my 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. A suggestion I borrowed from Dr. Howard Farran: 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 our agreement) at the beginning of treatment. We keep the post-dated payments in a “tickler” envelope sorted by date.

Steps to controlling A/R
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 it back under control:

1) Be certain that staff understands that no patients are to be scheduled for any treatment in excess of $200 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/resubmitted? Have some patients not been contacted/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 that includes the amount owed by each patient at the time of the appointment. The staff must examine each patient’s expected treatment, prior financial arrangements, and current balances. What’s being performed? What will it cost? Are we going to wait for a portion of it from insurance? What will the patient be expected to pay toward his or her treatment at the time of the appointment? Is there an outstanding balance from any other prior treatment?

All of the above questions should have been asked and answered before the appointment was made! If, for instance, 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. (I wouldn’t recommend this unless the patient has a spotless payment history.)

The “money sheet” gives 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 money owed tomorrow), the figure owed at the time of the visit is written in red ink on the “money sheet.” This sheet is taped on the front desk and remains 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 out the patient will not have the advantage of the previous night’s research—patients will simply not pay what they don’t believe/understand they owe.

A hard lesson in A/R
As the title of this article suggests, I went from .8:1 to 1.75:1 within a six-month period. With such a carefully laid out system for A/R control, how did I screw up so royally? We had been running as smooth as silk. Two business staff persons were responsible for the majority of financial arrangements and transactions. One of those was my office manager, who was also adept at running the monthly reports, graphing the results, and prompting me to review the state of the practice on a monthly basis.

With two highly skilled folks at the helm, how could I go wrong? One moved to Florida and the other (my manager) injured her back and was out for many months. We lost two critical personnel simultaneously. I was able to immediately place a new receptionist. I always strive for five-star team members. As such, I hired the very best person for the job, Cecilia. She is outstanding. However, she joined us with no related experience. She received “training on the run” as she was standing in for two very strong business staff members.

During the first few months, all appointments and financial arrangements had to be made by the more experienced clinical staff members. Although each was cross-trained to varying degrees, we couldn’t, and didn’t, keep up. We were lucky just to “process” patients in and out daily, schedule next visits, and have computer entries completed! Financial arrangements became a low priority. They were done on a random basis and to varying degrees of accuracy. Problem accounts weren’t addressed and monthly numbers and graphs weren’t run.

In my mind I used my crazy schedule as an excuse. I practice almost 40 hours weekly in three to four days, then fly from seminar to seminar. It was a poor excuse. I didn’t realize just how underprepared and overworked I’d left my clinical staff. They were trying their best to perform dual functions—skills that many of them had barely been trained for. We were so stressed for time that I never spent more than one or two lunch meetings preparing them to pinch-hit the missing business staff’s functions.

Receivables mismanaged is like a runaway freight train. Even when you regain control, the initial momentum can be overwhelming. It takes an enormous effort to slow the train, and even more to reverse the direction. Fortunately, Cecilia learned quickly, and my office manager recovered. Together, they’re now regaining control of the situation. We will not recover all of the outstanding receivables. The longer accounts lag, the less likely you’ll ever see the money. We’ll lose some patients as well. When patients are dunned for unexpected overdue balances, some attrition will inevitably occur.

My staff is now far stronger than before the crisis. All clinical staff is now able to understand an implement financial policy. This type of cross-training is invaluable, and should be done during good times, in the absence of crisis. With Cecilia at the financial helm, and with the support of the entire team, we have dramatically increased production, while dropping receivables. We currently show a ratio of .75:1 A/R to one month’s collections.

In retrospect, I learned a very expensive lesson. If a similar staff loss were to occur—one resulting in the need for a similar team effort and cross-training—I would make time to do it right. Though it seemed we couldn’t spare the time to cross-train properly (we could barely get daily computer entries done, how were we expected to take the time out to cross-train?), I now realize we couldn’t afford not to.

In the future, I would set aside an entire day. We would, ideally, go away from the distractions of the office—when on-site, numerous interruptions will inevitably occur. The site would likely be at a hotel where we would spend an uninterrupted, eight-hour session on cross-training. The time spent would be paid back many thousand fold. Hindsight is 20/20!