Learn to Manage Your Accounts Receivable

Dr. Jones opened a small animal practice in a midsize town. After a few months, the news about his compassionate pet care spread quickly, and his appointment schedule filled up. However, as the months turned into a year, Dr. Jones noticed something troubling. Despite his packed schedule and long working hours, his business’s bank balance was low, and he had fallen behind on a few bills. He started worrying about cash flow, especially around payday.

Cash-flow problems can have many causes. The most common are increased labor costs, too much inventory, an excessive owner’s draw, fraud and uncollected accounts receivable. In this case, after further investigation, Dr. Jones realized that his accounts receivable represented 15% of his revenue.

In a financially healthy small animal practice, accounts receivable should be less than 1.5% of revenue. I recommend an all-hands-on-deck approach if it exceeds 3%.

Owners of large and mixed animal practices, which tend to send monthly statements for their services, should look at the aged accounts receivable report instead. If 45% or more of the AR total is 90 days or older, it’s time to rethink the payment policies.

Here are a few ideas that involve your veterinary team and different procedures to lower the accounts receivables on your books.

Before a Client’s Arrival

During the COVID-19 pandemic, more practices than ever made new clients pay in advance for wellness checks, sick-pet visits and surgeries. Prepayments lower a veterinary hospital’s accounts receivable. If the charge covers only the exam fee, prepayments split the cost in two, so clients owe the difference if tests or medications are needed. If you collect payments upfront, clearly communicate your policy to clients.

Wellness plans are another solution to lower client costs and reduce a practice’s AR. Statistics show that millennials have an average of 17 paid subscriptions for things like streaming media and mobile apps. Baby boomers have eight. Besides maintaining pet health, subscription wellness plans spread the cost of preventive care over a set period. Your practice management software might allow you to automatically charge the client monthly. If not, consider contracting with a third-party service provider to ensure timely payments.

During the Visit

Signed written estimates are a great way to communicate expectations about the cost of medical procedures and treatment plans. Make sure your estimates are detailed and list each item. If anything changes, create a new estimate and require another client signature.

At this point, discuss payment options and collect the total after the client signs the estimate. If you display a price range, collect the lower amount. For example, if the estimate shows $1,200 to $1,500, ask for $1,200 upfront to ensure payment of most of the bill. If, for some reason, the quote was too high, refund the difference to the original payment form. Do not leave a credit on a client’s account.

What forms of payment do you promote? Most veterinary practices accept cash, credit cards, third-party cards like CareCredit and All Pets Card, and finance plans such as Scratchpay. Checks aren’t accepted as much today because businesses don’t want the risk or hassle. However, depending on your payment processor, you could use a check’s routing and account numbers to process an automated clearinghouse (ACH) payment.

Another option is pet health insurance, but understanding who submits a claim and how it is paid is critical. A small number of insurers reimburse clinics directly.

Meanwhile, some veterinary hospitals act as banks by offering in-house payment plans managed independently or through a service provider. These practices decide how much credit to extend to a client, the minimum installment payments and any additional fees. A small practice might have an in-house payment program but not promote the option, limiting it to friends, employees and loyal clients.

If you decide to grant credit, be strict and selective when formulating your policy to keep accounts receivable below 3% of total revenue. Unfortunately, some clients who intend to pay you put the debt at the bottom of their priority list during difficult financial times and when their pets are healthy (or worse, deceased). Clients who default on bills can harm your cash flow — the money you need to pay employees, vendors, taxes and other expenses.

When extending credit to a team member, be aware that you likely will write off an active account as bad debt if the person leaves. To reduce your accounts receivable further, consider offering veterinary care as an employee fringe benefit through an annual credit, a subsidized pet insurance policy or an automatic payroll deduction. Be careful, though. In many states, you cannot deduct outstanding balances from employee paychecks. Check with a lawyer or human relations specialist before proceeding.

After the Client Departs

When end-of-day closing procedures commence, pull any unpaid invoices. If a client left without paying, for whatever reason, send a bill immediately by email, text message or letter.

Next, pull an aged accounts receivable report each month showing how many days client balances are past due. Break them down by 1 to 30 days, 31 to 60, 61 to 90, and more than 90. Send monthly statements to all those clients because consistent reminders are paramount. The notices should be pleasant and informative. A friendly nudge is sometimes all someone needs to pay off a debt.

Make sure to add interest and service charges to past-due accounts, following your policy. If a client pays during the month, send a thank-you acknowledgment with the balance shown.

On the other hand, send a formal demand letter once a balance is 60 days old and state the last time the client made a payment. Send an invoice marked “Final Notice” if a bill sent during the prior month was ignored.

When an account is 90 days overdue, give the client 10 to 15 days to respond and then send it to a collection agency. At this point, write off the debt. The collection process might sound tedious, time-consuming and futile, but it doesn’t have to be.

Lastly, ensure your collection process is effective and lawful. Do you send letters by mail? How about emails with a payment link? Sometimes, a text message and link work best.

Dr. Jones realized he was too lenient with payment options because he wanted every pet to receive needed care. He promoted third-party credit providers, automatically flagged overdue accounts in his practice software, and followed his team’s advice to consistently send late notices each month. The changes generated positive results within a few months. The hospital’s cash flow improved, clients paid their bills on time, and Dr. Jones stopped worrying about making payroll.

ZERO BALANCES

Sooner or later, you will encounter patients for whom you want to provide free

or discounted services. In his book The Art of Veterinary Practice Management, Mark Opperman recommends creating a charity account for each doctor and then allotting a set amount for discounts or Good Samaritan services. The practice refills the accounts annually.

An alternative involves IRS-approved foundations and charities acting as nonprofit organizations or 501(c)(3) entities. Team members, clients and the public can donate to the funds, and the foundation or charity reimburses the hospital. Examples include the Veterinary Care Foundation, myBalto Foundation and The Pet Fund. (Learn more at go.navc.com/charity.)

Another option is to establish relationships with humane societies or animal shelters and refer patients to them for low-cost spay and neuter procedures or vaccinations. In addition, crowdfunding might help, at which point you can point clients to Waggle or GoFundMe.

SHOW ME THE MONEY

According to the American Animal Hospital Association, 11% of veterinary appointments result in no-shows. Charging a no-show fee can soften the revenue loss, but it might also hurt client relationships.