How can debt collection help me manage my practice?

The management of bad debt within a medical practice

One of the main risks associated with the management of any business and not just a medical practice, is the differentiation between revenue and the realisation of revenue into positive cash flow. What must be noted is that revenue does not necessarily constitute positive cash flow and will in many cases end up as a corresponding expense in the income statement through the write-off of accounts receivable that have become impaired due to the inability of debtors to pay their accounts.

This has been noted as a global issue and has not just affected the South African economy and healthcare industry but also that of the United States of America and many European Union members. The accumulation of revenue in accounts receivable has been noted as a growing concern in the healthcare industry and has been carried as an asset on many a balance sheet up until the pressures of interest rates and high debt levels started to catch up with the ability of patients to generate sufficient income to settle all their accumulated debt, as required by creditors.

The impairment of accounts receivable has had an adverse effect on the ability of the healthcare industry to generate positive cash flow from their current assets (outstanding patient fees) and has lead to most of these balances being expensed in the income statement and having exactly the opposite effect on bottom line profits, then the initial delivery of healthcare services had when the income was first accounted for.

A mind shift should be made to understand that when debt is concluded to be "bad" and written off, it is as good as writing the debtor (revenue capitalised as an asset due to the legal right to recover the debt) off twice. The reason for this is that the healthcare professional will now effectively have made a loss due to the opportunity cost of time that was spent on a patient that now can not pay his bills. The healthcare professional does not only lose the revenue from the patient that can not pay his account but also loses the potential revenue from another patient that could have been consulted during that time.

Revenue can not have a positive impact on a practice if the revenue is not realised into positive cash flow. The focus on revenue has been over emphasised by management of companies for many years, but due to the results of the international economic climate change, management has noted that focus should be shifted to the realisation of assets and the net results of the cash flow statement, rather then the down right assessment of the increase in revenue.

The expenses encountered through the management of debt is also an item that adds its toll to bottom line profits through the appointment of debtors clerks, credit controllers and administrative personnel which in turn drives human resource expenditure.

The effects of bad debt can be traced through the income statement right through to the balance sheet and may even catch up from prior periods.

It is with this in mind that Medical Practice Debt Collection wishes to apply the proverb "A bird in the hand is better than two in the bush" to bad debt and debt collection - it is better to recover a percentage of your accounts receivable, then carrying it as an asset up until it is required by International Financial Reporting Standards to be written off completely and realising a 100% thereof to the income statement as an expense, due to the fact that it has become unrecoverable.

The basic warning of "A bird in the hand is worth two in the bush," is that one must take care when assessing the financial position of your practice and not to place all your confidence in the ability of debtors to settle their accounts fully. If you are holding a bird in the hand, you have your meal for the evening. You can take that one bird, and be well fed (by managing bad debt you are able to realise a large portion of that debt to positive cash flow). If instead you let it go to pursue two birds (leave the debtors unmonitored and ungoverned) you've spied in a bush (allocated to the balance sheet hoping for realisation), you may catch neither, and wind up hungry for the night (a large portion of your accounts receivable balance may end up unrecoverable and as an expense).

This proverb points out that by passing up the opportunity to recover a large portion of doubtful receivables for a more promising possibility of realising the entire amount in the event that they should one day pay; you also run the risk of losing both the asset and the promising possibility of profits.

It is with this in mind that Medical Practice Debt Collection wishes to assist healthcare professionals in realising patient accounts receivable to positive cash flow and help prevent the assets realising as expenses.