As a part of the practice valuation, we look for available reports from most of the commonly used practice software programs. The statistics are utilized to evaluate the health of a practice and provide important information that purchasers and practice acquisition lenders require when evaluating their interest in purchasing a practice or financing the business. As the adage says, “garbage in, garbage out,” meaning, the accuracy of any computer report is limited to the accuracy of the information that is entered and maintained.
As an example, prospective purchasers and lenders both want to know the number of active patients in the practice. But what is the definition of an active patient? Generally, we look at the number of patients treated by the practice in the last 18 months. This time window has been an accepted standard for years and it is to your benefit as the practice owner to ensure that your practice data and reports are accurate.
If you are still utilizing paper charts, please be sure to conduct periodic chart reviews. When inactive charts are moved to storage, be sure to also update the practice software so inactive patients are not counted in the patient register. We often see practices with 7,000-10,000 patients on patient statistics reports but only 2,000 patient charts are actually located in the office.
Another report that is often overlooked is the accounts receivable (AR) report. If you want to know how well you are doing financially, review this report often. Your overhead dollars are actually a function of practice production, not collections. Your overhead may seem to be too high when compared to collections, but evaluating your overhead relative to actual production may reveal a quite different perspective.
One important component of the AR report is patient credit balances. These credit balances include patient overpayments (most likely due to duplicated payments by insurance companies), plus patient prepayments for dentistry not yet performed. Longstanding errors are usually going to be seen in the aged collection report, probably in the “over 90 days” or “over 120 days” columns.
For those practitioners who are planning for a transition, it is a good habit to regularly review this report. If you do not, you may find yourself at the sale of your practice writing checks to patients refunding their overpayments (credits) or transferring funds to the purchaser so that money is held for the patients to return to the office. In either situation, we have seen sellers having to transfer tens of thousands of dollars or more. How do you avoid this? Look at the report! If the balance or amount of credits is excessive, you may find that the office software has not been properly closed at the end of each month for years! To rectify this situation, go back and close each month individually until you are up to date. You also need to either write off very old accounts or send them for collections and remove them from your software.
Another point to note comes from the use of credit vehicles/patient financing plans. A problem arises when a dentist deposits the money received as prepayment for future patient services into the practice’s general bank account and that money becomes comingled with money deposited for services already performed. While there is nothing illegal or wrong with this practice, if the funds have gone into the general account, the due diligence review may not discover these credits. Without full disclosure by the seller, the purchaser may walk into a practice where many of the returning patients expect their continuing treatment will be provided at no additional cost. Patients will expect that their money has been properly transferred to the new practice owner.
An easy solution is to use a separate bank account solely for prepayments, such as escrow accounts are utilized by brokers and attorneys. As treatment is provided, money can then be transferred to the operating account. Keeping the prepayments separated allows the owner to more accurately track the practice collections and profitability. Further, this separation protects the practice in the event that a patient decides not to complete treatment and requests a refund; the money is readily available. Maintaining this separation also allows for easy accounting and transfer of the patient credits in the event of any practice transition.
We urge you to take a serious look at your accounting procedures for prepayment credits, whether or not you are considering a transition. These credits represent either unearned money by the practice (due to the patient) or expectations set by the practice to the patient: i.e., a non-cash referral credit. In any case, simply writing-off patient credits is not okay.
The time to discover how your practice looks in management reports is not the day you decide to sell (or buy) it!