Managing your finances can be a daunting task in every practice. One of the critical aspects of managing your finances is managing your accounts receivable. Effective account receivable management can help improve your practice’s financial health and ensure you are getting paid for your services. In this blog post, we will discuss the importance of A/R management and provide tips on improving it.
What is Account Receivable Management?
Account receivable management is the process of managing the money owed to your practice by your patients and insurance companies. It involves keeping track of all the outstanding invoices, following up with patients and insurance companies to ensure timely payment, and managing any disputes. By implementing best practices for accounts receivable management, you can improve the financial health of your practice and focus on providing quality patient care.
Example of Accounts Receivable
To illustrate accounts receivable, let’s consider a scenario involving a furniture manufacturer and a retail store. After delivering furniture to the store, the manufacturer issues an invoice for the products, and the amount owed by the store is recorded as accounts receivable. The furniture manufacturer then awaits payment from the store for the delivered furniture.
An electric company provides electricity to its customers and bills them after the service is rendered. The company records accounts receivable for unpaid invoices until the customers make the payment.
Many businesses offer credit terms to their customers, allowing them to make purchases and receive periodic invoices. This credit facility is often extended to frequent or special customers. Some businesses offer all their clients the option to pay after receiving the service, eliminating the need for immediate payment for each transaction. This allows customers to avoid the inconvenience of making payments at the time of purchase.
Key Points
- Accounts receivable (AR) is a short-term asset that represents money owed to a company.
- AR is generated when a company allows customers to purchase goods or services on credit.
- On the other hand, accounts payable represent money a company owes to its suppliers or vendors.
- The accounts receivable turnover ratio and days sales outstanding are used to assess the strength of a company’s AR.
- The accounts receivable turnover ratio calculates how often AR is collected within a given period.
- The DSO (Days Sales Outstanding) metric calculates the average duration it takes for a company to receive customer payments.
- Analyzing turnover ratio and DSO helps predict when the AR will be received and manage cash flow effectively.
Importance of Account Receivable Management
Effective accounts receivable management has several benefits for medical practices. In this section, we will discuss some of the benefits in detail.
Cash Flow Management
One of the primary benefits of effective accounts receivable management is improved cash flow. By managing your accounts receivable effectively, you can ensure you are getting paid for your services on time.
Reduced Bad Debt and Write-Offs
Effective accounts receivable management can help reduce bad debt and write-offs. By managing your accounts receivable effectively, you can identify delinquent accounts and take appropriate action to collect the outstanding balance. This can help reduce bad debt and write-offs, significantly impacting your practice’s financial health.
Enhanced Patient Satisfaction
Effective accounts receivable management can also enhance patient satisfaction. Communicating your payment policies clearly and consistently ensures that patients know their financial obligations. This can help prevent misunderstandings and disputes, improving patient experience.
Improved Revenue Cycle
A/R management is a crucial part of the revenue cycle. You can improve your practice’s revenue cycle by managing your accounts receivable effectively. This can lead to increased revenue, improved cash flow, and better financial health.
Better Financial Planning and Decision Making
Effective accounts receivable management can also lead to better financial planning and decision-making. By monitoring key accounts receivable metrics, such as days in A/R, A/R aging, and collection rates, you can identify areas for improvement and track progress over time. This can help you make informed decisions about your practice’s finances and future plans.
Challenges in Accounts Receivable Management
Accounts receivable management involves several root challenges that need to be addressed for effective management:
Poor Communication with Customers
- Lack of transparency and ineffective communication methods lead to miscommunication between the AR team and customers.
- Invoices may lack proper documentation or be sent to the wrong contact, causing confusion and delays.
- Issues like lost payments, unexplained short payments, or incomplete remittance information can arise.
- Poor communication can result in an increased workload for AR teams and a negative customer experience, potentially leading to legal disputes.
Inefficient Traditional AR Processes
- Traditional AR processes rely on manual workflows, leading to inefficiencies and errors.
- Tasks such as data entry, invoicing, and follow-up require significant manual effort and can result in inaccuracies and delays.
- Individual phone and email outreach and physical mailing of checks and invoices can slow down the collection process.
- Ineffective processes hinder timely payment collection and impact cash flow management.
Limited Access to Real-Time and Historical Data
- AR teams often struggle to access and evaluate data in real time due to fragmented systems and tools.
- Siloed data sources and reliance on reports and spreadsheets make gathering comprehensive and up-to-date information.
- AR professionals cannot provide timely insights to sales departments regarding credit terms or update collections teams on outstanding accounts without real-time metrics.
- Lack of historical data hampers accurate forecasting of customer payment issues and increases the workload when disputes arise.
Tips for Effective Account Receivable Management
Here are some tips on how to improve your A/R management:
Set Clear Payment Policies
Setting clear payment policies is essential for effective A/R management. Make sure your patients understand your payment policies, including payment terms, late fees, and payment methods. Communicate your payment policies clearly and consistently to ensure patients know their financial obligations.
Verify Insurance Information
Verifying insurance information is critical for effective A/R management. Make sure you have accurate and up-to-date insurance information for each patient. Verify insurance coverage before providing services and communicate any out-of-pocket expenses to the patient.
Submit Claims Timely
Submitting claims is essential for effective A/R management. Submit claims as soon as possible to avoid payment delays. Make sure you have all the necessary information to submit a clean claim, including accurate diagnosis and procedure codes.
Follow Up on Outstanding Balances
Following up on outstanding balances is critical for effective A/R management. Establish a process for following up on delinquent accounts, including sending reminders, making phone calls, and sending collection letters. Ensure you follow up consistently and document all communication with the patient.
Monitor A/R Metrics
Monitoring A/R metrics is essential for effective A/R management. Keep track of key A/R metrics, including days in A/R, A/R aging, and collection rates. Use these metrics to identify areas that require improvement and monitor progress on time.
Monitoring and Metrics Of Account Receivable Management
Monitoring and metrics are essential components of effective accounts receivable management. In this section, we will discuss key performance indicators (KPIs) for tracking accounts receivable management and using data analytics to identify areas for improvement.
A. Key Performance Indicators for Tracking Accounts Receivable Management
Tracking key performance indicators (KPIs) is critical for effective accounts receivable management. Here are some KPIs to consider:
Days in A/R: This metric measures the average days it takes to collect payment from when a service is provided.
A/R aging: This metric tracks the age of outstanding accounts receivable, typically broken down into 30-day increments.
Collection rates: This metric measures the percentage of outstanding accounts receivable collected within a period.
Denial rate: This metric measures the percentage of claims insurance companies deny.
Clean claim rate: This metric measures the percentage of submitted claims without errors or omissions.
By monitoring these KPIs, you can identify areas for improvement and track progress over time
B. Utilizing Data Analytics to Identify Trends and Areas for Improvement
Data analytics can also be used to identify trends and areas for improvement in accounts receivable management. For example, suppose you notice that a particular insurance company denies a high percentage of claims. In that case, you may need to review your billing practices to ensure you submit clean claims. Alternatively, if you notice a service consistently taking longer to collect a payment, you may need to review your payment policies or follow-up procedures.
Data analytics can assist in identifying opportunities to streamline processes and reduce costs. For example, suppose you notice that a particular service consistently generates denials. You may need to review your coding practices to use the most appropriate codes.
Conclusion
Following the tips outlined in this blog post can empower your accounts receivable function, leading to improved cash flow management and stronger financial stability. Prioritizing efficient accounts receivable practices can strengthen financial stability, accelerate cash flow, and contribute to the overall success of a business.
