Dentistry is not a business where patients should owe you money for a long-period of time. This article outlines the surprising costs of carrying excess accounts receivable at your practice.
The accounts receivable (A/R) balance is the amount owed to your practices for services already provided, but not yet collected. Put another way, A/R measures your uncollected production.
Some practices view a high A/R balance as the cost of doing business.
This is wrong.
Your dental practice is not a business where patients should owe you money for a long-period of time. While some accounts receivable is healthy, when properly managed, carrying a large A/R balance has a tremendous impact on your business – from collection ratio to overall profitability.
In this article, we review the surprising costs of carrying excess accounts receivable.
The collection ratio is the percentage resulting from funds collected divided by net production, typically measured over a 12-month period as collections will vary month-to-month. We recommend practices we work with target a collection ratio of 98%, with a range of 95% to 99% considered good.
When your dental practice is carrying a large accounts receivable balance, especially past due balances of more than 90-days, the likelihood of collection decreases. It is human nature is to focus on the immediate and, as time passes, patients will forget the quality oral care they received and be less willing to pay their bill. Think about it – do you remember the services you purchased 100 days ago?
The data proves this out as practices only have a 15% to 25% chance of collecting accounts once they are past due for more than 90 days. No more than 3% of your practice’s A/R should be past 90 days due (review our recommended A/R benchmarks here.)
As A/R ages, the ability to collect decreases, and this in turn impacts your collection ratio. If your practice wants to achieve a collection ratio of 98%+, you must keep your accounts receivable under control.
If your dental practice averages $1.5 million per year in revenue, moving your collection ratio from 94% to 98% adds $60,00 to your bottom line. Put the other way, if your collection ratio slips from 98% to 96%, your profitability just decreased by $30,000.
There is a significant cost associated with working your accounts receivable. When you aggregate staff time, mailing fees, and supply costs, sending a single bill to a patient costs your practice $4.00 to $10.00.
If a patient doesn’t pay after receiving the first statement, it gets even more expensive. Most practices will send out another statement once a bill is 30-60 days past due and the office manager may make a collection call. Combining the mailing costs for multiple statements and staff time for collection calls, your practice's cost to collect adds up fast.
For example, I spoke to a practice recently who admitted to sending three statements and making two collection calls in an attempt to collect $25. The hard and soft costs of trying to collect this 90 day past due balance far exceeded the amount they were trying to collect. While having an internal process for persistent A/R outreach is important, you also need to evaluate the ROI of engaging in expensive collection outreach.
In addition, most office managers we speak with state that dealing with collection issues is the worst part of their job. Not only is it not fun to ask people to pay their bills, it takes time away from more important, and more productive tasks. In addition to the billing related costs of chasing down a past due balance, there is a productivity loss that, while difficult to measure, can be meaningful.
Fortunately, Pearly’s products including Pay-by-Text and A/R Collection Automation dramatically decrease your cost to collect by automating outreach and increase collection rate by providing a frictionless payment experience for patients.
A dollar today is worth less than it was last week. Inflation in the United States is projected to be 2.24% in 2021 according to Statista, which seems like a small number.
While the inflationary impact of your aging A/R is certainly much less significant than billing costs or a decreased collection ratio, it shouldn’t be ignored.
To make the math easy, let’s assume inflation decreases the value of $1 by 0.20% per month. If you have $100,000 of accounts receivable that move from 30 days past due to 60 days past due, you just lost $200 to inflation. This excludes the more significant costs associated with a decreased probability of collection and delayed cash flow to your practice.
Inflation is a fact of life, but don’t let it get in the way of your practice’s profitability.
When your practice delivers treatment to a patient, you incur the associated staff and overhead costs. If you let the past due balance age and eventually become uncollectible, you are not only missing out on this patient’s payment, but also the revenue you would have collected from dental services delivered to a patient who pays promptly.
As a dentist, time is a key limiting factor. There are only so many hours in a day and appointment slots available. By not setting a clear billing policy and keeping A/R in check, your practice runs the risk of a reduced collection ratio PLUS the opportunity cost of treating a paying patient.
Decreasing your accounts receivable is an easy way to increase revenue and practice profitability. Forward-thinking dentists and office managers keep a close eye on the A/R Aging report and understand the importance of meeting or exceeding industry [benchmarks].
If your practice is struggling with exorbitant accounts receivable, take a look at our best practice guide: 9 Tips to Maximize Accounts Receivable Collections .
If you want to collect more payments faster today, book a demo with a Pearly AR expert to learn more.