The account receivable turnover ratio is referred as an important financial ratio to indicate the Ability of the company to collect its accounts receivable. When you are setting a benchmark to accelerate receipt of payment for services and then improve the processes to support the goal; you should consider the account receivable turnover ratio as one of your important KPIs.
Before going into more details about account receivable turnover ratio, we must understand about account receivable.
What is accounts receivable?
If you want to reduce the lag time of accounts receivable more than three months to below the national MGMA benchmarks then you need to have a good accounts receivable process.
Generally half of the practices in the U.S. are targeting to the goal of receiving payment within two months of providing medical services.
However, you need to consider your geographic area, payer mix, and type of practice because these are some factors which could shorten or longer your days in account receivable.
To know days in A/R we must understand how to calculate it.
Days in A/R= (your total accounts receivable/ your monthly charges)* the number of days in a particular month.
Account receivable turnover ratio is an average
Accounts Receivables Turnover = (Net Annual Credit Sales / Average Accounts Receivables)
Example- Dr. Rick is an oncologist who accepts insurance payments from a limited number of insurers, and cash payments from patients not covered by those insurers. The accounts receivable turnover ratio of Dr. Rick is 10, which indicates that the average accounts receivable are collected in 36.5 days. However, he may struggle if his credit policies are tight during an economic downturn, or if a competitor accepts more insurance providers or offers deep discounts for cash payments.
From the above formula, you have noticed that the accounts receivable turnover ratio is an average and an average can hide important details.
For example, in average, some past due receivables might be “hidden” or offset by receivables which are paid faster than the average.
Hence to detect slow-paying customers, you should review the detailed aging of accounts receivable provided that you have access to the company’s details.
Once you get the accounts receivables turnover then Compare this figure with past accounting periods. This comparison helps you to know if you are maintaining collection rates or if the collection is lagging. Additionally, you should know that your accounts receivable should never exceed 1.5 times your monthly charges, but this is just a baseline.
Current A/R is Accounts receivable of 0 to 30 days while anything 30 to 60 days out from the date of service should be the list of accounts worked by your staff or billing company.
The billing department needs to work on collecting payments or setting up payment plans. However, if you notice Medicare claims showing up in the 30 to the 60-day mark, that is a red flag to look at resolving payer denial issues.
It is crucial for your business to track accounts receivable ratios over periodically. You need to tighten your credit policies and increase collection efforts if you have low accounts receivables turnover.
While you may be too aggressive on credit policies and collections and be curbing your sales unnecessarily if it’s too high. Finally, you can plan more strategically by knowing how quickly your invoices are generally paid.
Are you struggling with the days in A/R and want to get your claim settled at the earliest? We can help you to grow your cash flow.
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