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Leveraging Days in A/R to Assess Financial Stability

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Clinicians and billing professionals alike know measuring cash flow is essential to making sure they have financially healthy medical practices; however, there are other key metrics, such as days in accounts receivable (A/R), that should be evaluated to ensure optimal revenue cycle performance.

Simply put, days in A/R is a measure of the amount of time it typically takes for all responsible parties to pay the practice for a service; it represents the number of days that money owed to the practice is outstanding. The impact days in A/R has on your revenue cycle is pretty clear – the longer it takes to collect payment for services rendered the slower your cash flow is. This, in turn, influences how quickly you can pay all your other bills.

So how do you calculate days in A/R? The answer to that is pretty simple: begin by determining your current receivables by subtracting the current credit balance from the total receivables (in effect, adding the balance because you are subtracting a negative number). Once you have calculated that number, you will divide it by your practice’s average daily charge amount, which is found by dividing total gross charges for the last 12 months by 365 days. (Please note that some practices may prefer to calculate this on a three-month basis instead of a one-year period.)

Generally, those practices with days in A/R less than 35 are the best performers; average performers range in between 35 to 50 days in A/R; and those with A/R greater than 50 are poor performers.

After you’ve measured your days in A/R, it’s important to recognize that favorable figures can sometimes hide underperformance. For example, you need to address which specific insurance carriers have days in A/R that are significantly higher than your average days in A/R. You should also recognize the impact of credits and know how to appropriately treat payment plans to avoid having an overly positive impression of financial performance.

Days in A/R is arguably the best single indicator of the performance of the revenue cycle; to ensure that it appropriately reflects your performance, however, you must understand all of the inputs and nuances of this important metric.

To learn more about the nuances of measuring days in A/R and other key metrics, download this free resource guide, Key Metrics in Revenue Cycle Management: Measurements that Ensure Peak Financial Performance.