money matters
ACCOUNTS RECEIVABLE , CASH FLOW AND HIDDEN SECRETS OF MERCHANT PROCESSING
by Matthew Caldwell
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F rom a banker ’ s perspective the single most important aspect of a dental practice is how efficient that practice generates billings and turns those billings into cash . The conversion from accounts receivable to cash is a critical dynamic of a profitable dental practice and can successfully be mastered by understanding and implementing a disciplined approach to collections .
Accounts Receivable
The Accounts Receivable ( AR ) balance represents money owed for services rendered but not yet collected by the practice . The AR report should be monitored routinely . There are two types of accounting methods : accrual and cash . With the main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized . The cash method is most used by small businesses and personal finances . The cash method accounts for revenues only when the money is received and for expenses only when the money is paid out . On the other hand , the accrual method accounts for revenue when it is earned and expenses when
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they are incurred . The revenue is recorded even if cash has not been received or expenses have been incurred but no cash has been paid . Accrual is the most common method used by businesses . The average dental practice falls somewhere in between . Because dental practices typically have outstanding accounts receivables from Medicaid , in-network , patient balances or certain fee-for-service payment plans , a third accounting method called the modified accounting method exists . Since the cash method eliminates AR from the balance sheet , it is important to ensure that your practice software can generate detailed AR reports each month . After all , collecting on AR in a timely manner is vital to the success of your practice . In traditional commercial and industrial companies such as manufacturers and wholesalers , AR is recorded as a gross amount . If manufacturers collect less than the amount they invoiced , the difference is usually recorded as bad debt expense . In the dental community however , it is not uncommon to see three types of AR .
Gross Fee-for-Service
Gross fee-for-service revenue is defined as the full value of services provided to patients , including Medicaid patients . In a fee for service practice , the provider sets a price for the service rendered and bills the client for that amount . In other words , gross charges are the dollar amount that would have been billed to payers if no discounts or other negotiated reductions had been agreed upon .
Adjusted Fee-For-Service or Adjusted Accounts Receivable
Adjusted fee-for-service is equal to the gross charges less any adjustments . Think of adjustments as the actual value of the services performed for which no payment will be received or expected . A few examples of adjustments include : charge restrictions placed by Medicaid , contractual adjustments , professional courtesy adjustments , and employee discounts . It is a good practice to review the adjustments periodically to ensure that healthy profit margins are being maintained .