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Financial Matters DENTAL TRIBUNE | March 20108A AD Receivables at risk Does your practice extend open credits to your patients? This is an important question as veteran den- tal practice owners know that their practice’s fiscal health, profitability and success require balancing a pru- dent patient financing policy. Balance allows the flexibility to accommodate your patients, and it needs to be firm enough to avoid cash flow/collection problems that may have material consequences for both the clinicians and staff. Even a temporary cash flow problem is stressful for a practice owner, creat- ing the potential for uncertainty in making the payroll. What is a dental practice’s uncol- lectible percentage? While this num- ber will vary substantially (due to many factors ranging from service mix, use of practice management software, aggressive or lax payment policy compliance), when averaged, it shows the nationwide number of approximately 2.5 percent. Many practice owners think they can live with 2.5 percent. However, further inspection reveals a more in-depth appreciation of collection effective- ness on a practice. Let’s suppose a practice gross- es $1 million annually. If the prac- tice has bad debt or “uncollectible receivables” of $25,000, that is 2.5 percent, then that write-off number would be correct (See Table 1). Accounts receivable trends for any business, from a FORTUNE 500® company to a dental practice, are almost identical. Receivables are like gravity. You can’t resist gravity and you can’t resist receivables’ falling value over time. Table 2 shows the effects of time on receivables. Each $1 of accounts receivable at 90 days is statistically only worth $0.72. Thus, the case can be made for dental practices to devote more focus to their “payment is due upon ser- vice” policy so the practice is not acting as a bank to patients. Offering patients (monthly, more affordable) financing options makes optimal treatment acceptance more likely, as well as removes a practice that offers selective financing from appear- ing as credit officers and lenders to patients. Today, a good patient financing plan will accept from 50 to 60 per- cent of the patients who apply. There are patient financing companies that indicate an approval rate of 90 per- cent based on the total patient base being considered. That may be a mis- leading number as not every patient wants to be approved. Your patient- financing candidates can automati- cally be any who might remark: ◗ “I forgot my checkbook.” ◗ “Just bill me.” ◗ “I can pay you $100 a month until we’re done.” ◗ “I want to have the treatment, but can’t afford it now.” ◗ “Let me know the balance after the insurance pay-in.” It is prudent to offer patient financing when you examine what consumers are advised to pay on a graded scale. Data reveals the rec- ommended consumer order of pay- ments is as follows: 1) Child support. By law, credit bureaus must report any informa- tion received about overdue child support, as long as it’s verified by the proper agency and is not more than seven years old. Consumers are told this should be the No. 1 payment priority. Penalties, considered quite serious, include garnished wages, liens on property and a suspended driver’s license. Dentists should be aware that finance companies might consider an open child support lien on a credit bureau report as very negative. 2) Mortgage. After more than 90 days, late mortgage payments can end up on a credit record. Mortgages also tend to have hefty late payment fees, and if a mortgage holder miss- es two or more, a lender may start foreclosure proceedings. 3) Car loans. Repossession laws vary — in some states repossession happens after only one missed pay- ment. Mass transit isn’t applicable everywhere and the risk of not hav- ing a vehicle probably impedes a person’s ability to work. 4) Taxes. The Internal Revenue Service (IRS) is tough when tax- payers don’t pay on time. Penalties accrue with time and the clock keeps going from the time of the infraction. 5) Bank credit cards. Credit cards are important. Paying them on time is more important than ever as late payments give all credit card issu- ers the right to reprice a cardholder because of economic risk status. Recent legislation was passed about sudden rate increases from credit card companies, though the effective date isn’t until later this year. 6) Department store cards. Many will negotiate and/or accept lower payments for various periods of time. 7) Utilities (electric, gas, water). Utility companies may work out payment schedules for consumers (though security deposits for future services will be a factor). Nation- wide, rules vary as regional regula- tors have rules protecting home- owners from losing vital services and keeping consumers safe. 8) Student loans. Federal stu- dent loans may be deferred during times of financial challenge. When By Keith D. Drayer Practice Annual Revenue $1,000,000 Eligible Receivables $850,000 Bad Debt $25,000 Bad Debt as a % of Eligible Receivables 2.5% Practice Annual Revenue $1,000,000 Less: Cash Payments* $150,000 Eligible Receivables $850,000 Bad Debt $25,000 Bad Debt as a % of Eligible Receivables 2.5% (* Cash = Cash + Checks) Practice Annual Revenue $1,000,000 Less: Cash Payments $150,000 Less: Credit Cards $250,000 Eligible Receivables $600,000 Bad Debt $25,000 Bad Debt as a % of Eligible Receivables 4.2% Practice Annual Revenue $1,000,000 Less: Cash Payments $150,000 Less: Credit Cards $250,000 Less: Insurance $400,000 Eligible Receivables $200,000 Bad Debt $25,000 Bad Debt as a % of Eligible Receivables 12.5% Does your practice extend open credits to your patients? Table 2: Value of aged accounts receivable $1 is worth the following amounts over time Table 1 g DT page 10A

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