The Importance of Accounts Receivable Ratios.

Today I want to discuss a topic that one would assume all practice administrators should have an intimate knowledge of; that is the importance of accounts receivable ratios to the success of their practice. However, over the past few years, as I've brought on many a struggling client, it has become painfully clear that there are a great many administrators out there that do not understand the basic concept of ratios, let alone their immense impact on the profitability of their practice.

First I'll give an explanation of an accounts receivable ratio. The ratio simply means the dollar amount of uncollected claims that is currently on your accounts receivable report divided by the amount of claims billed in the last 30 days.

Now, why this is such an important tool, and how it can be effectively used to make your practice more profitable. The industry standard guidelines for AR ratios set forth by the MGMA states that a physician's accounts receivable should be at or less than twice the amount of claims billed in a 30 day period. Now, even for practice managers that understand the basic ideas of AR ratios, this guideline has the ability to have a drastically negative effect on the profitability of the practice! Here's why: Per MGMA standards, it is acceptable for a physician that bills out $100,000.00 per month to carry double that amount on their AR-$200,000.00! This equates to an AR ratio of 2 (the balance is twice the amount of the last 30 days worth of claims billed by the physician).

In my opinion, a ratio of 2 is too high!

Tracking ratios has many positive consequences. The most important is that it allows you to have a clearer understanding of how clean your AR really is. Then it allows you to set new, more meaningful goals for your AR.

Let me explain how I use ratios to help my clients become more profitable. Every single day I review all my clients' ratios to determine if they meet my standards (I have set an AR ratio goal of 1.10, not a 2!). Then, I can more accurately review the reports to determine any causes as to why a certain ratio may not be at that goal. Then I can react accordingly and get that money coming into the practice. Yes, there is more to it than that, but this is the basic concept.

I can't tell you how many times I have had a new client tell me that a ratio of 1.10 was impossible. It is possible, if we change our paradigms of what is acceptable in our practices. It is possible if we understand how to effectively track our AR balances and stop "reacting" and start "pro acting" to get the results that we desire. This is really the essence of this particular blog; to show that by having a clear understanding of AR management principles, we can have a clear vision, a clear plan, and ultimately become pro-actors instead or reactors to our success.

I am proud to say that over the years we have taken practices that had ratios of 2 and above and cleaned them up to our standards. Many have ratios of a 1 or less! Think about that. If a client has a ratio of 1, this means that the AR is extremely clean, with the majority of the claims well within the "clean collections" time frame.

Success is pro-action, not reaction.

Thanks for reading! Have a great day!

Sharon