Dust off your veterinary practice's accounts receivable

ADVERTISEMENT

Dust off your veterinary practice's accounts receivable

If low cash flow is hobbling your equine practice, outdated policies may be to blame. Here are six steps to collecting money you've earned on old invoices.
source-image
Oct 01, 2011

Every equine practice has its own philosophy and protocols regarding accounts receivable. In most cases, billing is treated with kid gloves. No veterinarian wants to be seen as the bad guy, and that fact turns the entire process into a downward spiral of poor cash flow, ancient accounts receivable, and practice owner despair.

Equine veterinarians tend to want to please everyone—except themselves. They try to cultivate a reputation for being caring, nonconfrontational, and easygoing—at the expense of a decent paycheck as the main revenue producer for the practice. This attitude makes accounts receivable a serious issue in most equine practices. And most practice owners don't even know how much money is being tied up in billing—and for how long. That has to change.

STEP 1: ASSESS THE PROBLEM

The first step to returning some sanity to accounts receivable is to determine your accounts receivable turnover. This ratio shows whether your practice is effectively collecting payments on its accounts receivable. A high turnover indicates higher cash-basis sales (money received at the time of service) or efficient collections. A low turnover indicates collection problems and possibly bad debts.

Many practice owners talk about charging interest on clients' past-due accounts, but very few actually do it. That means, in essence, that unpaid balances are interest-free loans to clients. Not collecting payments on time can create serious cash flow problems.

Here's the simple equation for calculating your practice's accounts receivable turnover:

Net sales ÷ Average accounts receivable amount (add the amounts of accounts receivable at the start of the period and the end of the period and divide by 2) = Turnover ratio

Here's an example. Say you have net 2010 sales of $500,000 (found in your production report). Your accounts receivable on Jan. 1, 2010, was $55,000 (found on your balance sheet as of Dec. 31, 2009) and on Dec. 31, 2010, was $65,000 (found on your balance sheet as of Dec. 31, 2010). Now it's easy math:

$500,000 net sales ÷ $60,000 average accounts receivable ($55,000 + $65,000 2) = 8.33 turnover ratio

What do you do with the turnover ratio? You can convert it into the number of days you take to collect money. For the case above, if you divide 365 days in a year by your 8.33 turnover ratio, you discover that you take roughly 45 days to collect money. Is that a problem? Yes, because your vendors ask for payment in 30 days. That means you're behind in paying vendors, which, over time, leads them to demand cash on delivery from you.

STEP 2: CHANGE YOUR ATTITUDE AND CHARGE IN THE MOMENT

Once you see the problem, you need to start changing your mindset and that of your team members. It's time to be assertive. Remember that when you bill clients, you're loaning them money. Are you a bank? Were you taught in school how to be a banker? I doubt it! I know it's easier to say, "I'll bill you" than face up to your fear of confronting a client about money. But you offer high-quality medical care, excellent products, and outstanding client service. You're also the owner of a small business who needs to improve cash flow. So start asking for payment at the time of service. Create a protocol for how and when you contact clients about past-due bills. And set up the time frame for turning past-due accounts over to a collection service.

It can be hard to change your career-long habit of not asking for immediate payment, but remember that most people—including you—pay at the time of service for everything from groceries to car maintenance to doctor's visits. This is an accepted protocol in small businesses. So be assertive!

STEP 3: SPEED UP COLLECTIONS

If you can't collect fees at the time of service and you need to bill, here are a few things you can do to hasten collections.

> Turn in completed invoices the same day you perform the services.

> Ask the person in charge of billing to check invoices for completeness and send bills the same day or at least batch bills on a weekly basis. Bills can be sent via e-mail or snail mail, take your pick.

> Don't wait until the end of the month to bill. That's an all-too-easy way to needlessly add more days onto your billing cycle and worsen your turnover ratio.

STEP 4: KEEP TRACK OF CREDIT CARDS

To improve billing and minimize accounts receivable, ask clients who don't want to pay at the time of service to give you credit card numbers to keep on file. If you do, be sure you're taking the necessary precautions to protect those numbers from hackers and identity thieves. (See "Keep cards secure" below for more.) If clients authorize you to bill them on their credit card on file, do it the day of service or as soon as possible afterwards.

STEP 5: OUTSOURCE YOUR BILL COLLECTION

Encourage clients who never seem to have cash, check, or a standard credit card on hand at visits to sign up for a third-party payer. Money for your products and services will show up in your account within a few days after a visit, and the third party takes care of billing the client. This way someone else takes care of billing and money collection, and you pay a merchant fee for the service.

When evaluating a third-party lender who does this, ask the company for references of practitioners who use the service. You'll be able to make a wiser decision after you call a few of your colleagues and find out what they think, both good and bad.

STEP 6: CAN'T BE ASSERTIVE? HIRE SOMEONE WHO IS

A reasonable and fair but assertive person should always handle your accounts receivable. It's easy to talk about strategies to improve billing, but a professionally assertive person will make the difference. If that person is not you, hire someone who's friendly but firm to help.

Accounts receivable will remain a part of equine practice, but there are ways to improve your process. (Did I mention billing at the time of service? That bears repeating.) I challenge each and every one of you to get your annual turnover ratio turnover up to 12, which is 30 days or less. I know you can do it. You're an equine veterinarian, after all. You're already a master at fixing just about anything.

Keep cards secure

Credit card companies have developed guidelines called PCI standards for securing customers' credit card information. These standards represent the minimum security a business must ensure for clients who hand over or use their credit card numbers. For instance, you shouldn't keep credit card numbers on a computer that's connected to the Internet. If you do, make sure your Internet firewall is working properly. And when you keep credit card numbers for billing purposes, consider encrypting the numbers with a code only you and one other person know; for example, an "A" is 3, a "C" is 4, an "M" is 5.

For the most up-to-date information, contact your merchant credit card company and ask for assistance. You could be held liable for credit card numbers stolen from your business, so make sure your security standards are up to snuff.

Veterinary Economics Editorial Advisory Board member Dr. James Guenther, MBA, CVPM, is owner and president of Strategic Veterinary Consulting in Asheville, N.C. Send questions or comments to

Hot topics on dvm360

Vetcetera: The complex topic of canine fear-related aggression

A guided tour of resources for addressing this popular and complicated subject, featuring advice from Dr. John Ciribassi.

Reality TV and the veterinarian: Discussing mainstream dog training advice with clients

Your clients may be getting behavior advice from cable TV. Get your opinion in the mix.

Blog: Election results pose obstacles for veterinary prescription law

Flip in U.S. Senate's majority may slow progress of Fairness to Pet Owners Act.

The war between shelters, veterinarians needs to end

Despite practitioners’ legitimate gripes, they’re hurting themselves.

7 steps to a better relationship between veterinarians and rescue groups

A DVM in the city shares his advice to veterinary practices for working with rescues.