This quote from Peter Drucker's 1954 book The Practice of Management has become a cliche, but is still applicable when it comes to dental practices and accounts receivable.
What is your accounts receivable (A/R) balance?
If you don’t know the answer, you need to dig into the numbers ASAP. The A/R balance of your practice is easy to pull from your practice management system or analytics software such as DentalIntel.
Let’s assume you now have your total A/R number and aging report breakdown.
The accounts receivable balance at your dental practice compared to the best-practice benchmarks paints a picture of your billing culture and collections success. Carrying an excess A/R balance costs your practiceand decreases profitability.
In this guide, we’ll highlight our best-practice goals and industry benchmarks for the key accounts receivable related metrics for dental practices: 1) A/R Ratio; 2) Collection Ratio; and 3) A/R Aging Report.
Accounts Receivable Ratio
One of the most important, and easy to calculate, metrics to measure your payment performance is the Accounts Receivable Ratio. This ratio is determined by your total accounts receivable divided by your average monthly production.
The Accounts Receivable Ratio goal, as reported by dentists and industry experts for decades, is 1.0.
This means your total accounts receivable is equal to your average one-month production. Our team here at Pearly agrees and work with our dental practice customers to achieve an Accounts Receivable Ratio of 1.0.
For example, if a dental practice is producing $50,000 per month on average and total accounts receivable are $50,000, the Accounts Receivable Ratio is exactly 1.0 ($50k/$50k).
If your dental practice produces $55,000 in an average month and your total A/R is $75,000, your Accounts Receivable Ratio is 1.36 ($75k / $55k).
Depending on the stage of your practice, patient base, and risk tolerance, your Accounts Receivable Ratio may be higher or lower than 1.0. If your practice has a high Accounts Receivable Ratio, but you understand why and are okay with it, great!
Data gathered by Sikka Software from more than 12,500 dental practices shows that the average dental practice carried a total accounts receivable balance of $116,744.18 in 2016. This metric is an average across all dental practices surveyed and does not account for total production so is not necessarily helpful for comparing your practice. However, this total is instructive as it highlights how many practices are essentially extending lines of credit to customers to the tune of $100k+! You are in the business of delivering quality dental care, not banking.
The Accounts Receivable Ratio is a helpful benchmarking metric that allows for an apples-to-apples comparison across practices with varying production volume. Go ahead and calculate the A/R Ratio for your practice now and if it's over 1.0, schedule a free consultation with a Pearly expert to review solutions.
Collection Ratio is a measure of your total collected funds divided by your net production, expressed as a percentage. Net production is gross production minus adjustments. We recommend calculating your Collection Ratio over a one-year period as there will be changes month-to-month.
Put another way, your practice’s Collection Ratio is way to determine how much cash do you actually collect from oral care services billed. A Collection Ratio of 95% to 99% is considered "good" and it is! Pearly works with practices who strive for excellence and set a Collection Ratio goal of 98%. This means that for every $100 of net production, your practice successfully collects $98.
Let's say your dental practice totals $1,250,000 per year in gross production, with 3% for adjustments, for a total net production of $1,212,500. To achieve a Collection Ratio of 98%, your practice needs to collect $1,188,250 of your $1,212,500 in net production.
Dental practices should collect 98% of net production.
Failing to collect for services rendered is a thorn in the side of many office managers and dentists. Not only do you miss out on the payment due for services already provided, your practice is missing the collectible revenue from providing treatment to a paying patient during the same appointment slot.
Increasing Collection Ratio directly impacts the bottom line. Your practice has already paid for the overhead costs, labor expenses, and more to provide treatment. Collecting an additional $10k, $35k, or $50k that you typically would have written-off directly improves your practice's profitability.
If your Collection Ratio is below 98%, it's time to take action. Fortunately, increasing your collection rate does not need to be painful. By improving your systems and staff training, your practice can achieve the goal Collection Ratio. It is one of the highest ROI areas of focus to your practice, especially in today's challenging economic environment.
Not all accounts receivable are created equal. The longer a bill is past due, the more difficult it becomes to collect. The A/R Aging Report gives you a scorecard to measure the health of your total accounts receivable balance.
Most practice management systems or other analytics tools will show you the total amount outstanding that is 0-30 days past due, 31-60 days past due, 61-90 days past due, and outstanding balances over 90 days.
Forward-thinking practices routinely review their A/R Aging Report for a snapshot of how promptly patients are paying for services. If two practices have total accounts receivable of $100k, but for one practice 80% are under 30 days and then other practice has 80% over 30 days, the financial health of each practice is quite different.
To manually calculate a A/R Aging Report, you should take the total A/R for each age segment and divide it by your total accounts receivable balance. This will give you a proportional breakdown of your A/R by age segment. Below is an example of a practice with $100,000 in total accounts receivable with $75,000 of the total balance less than 30 days past due.
In this example, the practice has 75% of their total A/R less than 30 days past due. Complete this calculation for each age segment and you'll have a A/R Aging Report. You can also cut the data by invoice count to understand the percentage of total outstanding bills in each age segment, but we find using dollar amount to generally be more helpful.
Note that the A/R Aging Report is a point-in-time snapshot and will constantly evolve as bills go out and payments come in. It is therefore important to frequently review this snapshot of collections health.
Now that you have the A/R Aging Report for your practice, let's look at Pearly's A/R Aging goals. This breakdown was derived from several consultants, industry experts, and internal data to determine healthy practice A/R.
No more than 10% of your A/R should be more than 60 days past due.
If your practice has $100,000 in total accounts receivable, $75,000 should be no more than 30 days past due while only $3,000 should be over 90 days past due according to Pearly best-practices. These are certainly aggressive goals, but with the right team training and innovative systems, many dental practices we work with match or exceed these metrics.
It is not enough to have a simple rule-of-thumb such as "no more than 15% 60 days past due." Your dental practice should have a goal for each category based on the unique set of circumstances of your practice and patient base.
According to Sikka Soft, the average 90+ days past due A/R balance in 2017 for dental practices was $47,003.15. For our team here at Pearly, this pains us to see.
For balances over 90-days past due, practices typically are only able to collect 15% to 25% of the total. Therefore, for a practice with nearly $50k of A/R aged over 90 days, tens of thousands of dollars need to be written off. Sending accounts to a third-party collection is always an option, but this should be used sparingly as it may damage your relationship with patients.
The vast majority of your patients want to pay in a timely manner and it's up to you to offer them a modern way to complete payment with multiple payment methods. Pull up your A/R Aging Report and compare it to Pearly's report goals. How you stack up tells a story about your billing process and systems.
When it comes to billing and collections, the three key metrics your dental practice should closely monitor are 1) A/R Ratio; 2) Collection Ratio; and 3) A/R Aging Report.
Dentists, office managers, and practice staff have a million things to manage on a daily basis and accounts receivable is typically low on the priority list. However, as this guide has demonstrated, improving your A/R metrics is one of the most ROI-positive activities you can focus on as a practice.
Remember that "what gets measured, gets managed." Use this guide to see how your dental practice compares to best-practices and then take action as needed.
If you'd like a free A/R Consultation, please book a demo with a Pearly expert.