Improving Cash Flow

A Professional Diagnosis

Guardian's aging report tracks the age of outstanding bills. In March, it showed that 38 percent of the bills were 31 to 60 days overdue, 27 percent were 61 to 90 days overdue, and 30 percent were 90 days or more overdue. Only 12 percent of patients — one in eight — paid within 30 days after having received care.

Advisor Logan quickly identified three problem areas that needed attention. First, Guardian's patient bills did not carry a due date. They also extended an offer to pay by credit card, but only in small print on the back. In an age when consumers use credit and debit cards for most payments, that was a serious oversight.

In short order Danzey redesigned the layout of Guardian's billing statement. He made sure it prominently displayed the due date and the credit-card-payment option on the front of the bill — right alongside the amount due.

As for Guardian's aging report, the data it provided was terribly skewed. The report showed more than 60 percent of bills 30-plus days past due. Yet typically, Guardian's staff waited three weeks after the date of service to send out the bills. Sometimes they waited as long as six weeks. The result? Many bills that were technically overdue had not even arrived in patients' mailboxes.

The billing delay obscured Guardian's true financial condition. "When you have a bogus start date [on billings], the whole picture is unclear," Logan said. Again, acting quickly and decisively, Guardian's staff worked hard to send bills out as soon as possible after the date of service, reducing the delay from 15 to 2 business days.

With his bills newly designed and his aging report more accurate, Danzey and his staff turned their attention to the truly delinquent accounts.

Guardian never made it a practice to write off bills that were 120 days overdue or more. Instead, it carried those uncollected debts indefinitely on its accounts-receivable balance sheet. That too skewed the picture of Guardian's financial health. "You need to have some cutoff date where you take it off your books," Logan advised Danzey. "There can be tax advantages to doing that, writing it off as a business loss."

Not only did Danzey start writing off such bad debt, he also took a hard line in drafting a new collections letter for overdue payers. Under contract terms with health insurers, Guardian can refuse to see patients who don't pay their share of bills after 120 days, but must see late payers as long as they don't reach that past-due point.

Danzey's letter stated that the unpaid bill would be turned over to a collection agency if not paid within 10 days — and the patient would have to find another doctor for any future medical care.

"The language [of the collections letter] is simple, clear, and direct; sets a deadline; and includes a consequence — in this case referral to a collection agency and being dropped by the practice," Logan said. "It says, ‘This truly is your last chance. We're firmly at the end of this process.'"

Joseph Anthony, a tax professional in Portland, Oregon, who writes about finance and tax issues, suggests other strategies small business can take to encourage prompt bill payment: Create incentives, such as discounts, if bills are paid before the due date, or speed up the ordering, shipping, and billing process. For example, have customers fax orders. Ship and bill the next day, and deposit checks as soon as they arrive.

Other experts suggest charging delinquent accounts hefty late fees (say 2 percent a month). They also suggest withholding new merchandise or services if bills remain unpaid. If all else fails, try to get a least a partial payment. But beware — such harsh measures could send your customers across the street if you are in a competitive industry.

The impact of Danzey's collection effort has been nothing short of miraculous. As of mid-July, 96 percent of patients paid their bills within 30 days of receiving their first billing statement. Only two percent were in the 31 to 60 day range, and 2 percent were 61 or more days past due.

More importantly, Danzey slashed total accounts receivable by more than half in just five months, from $790,000 in late March to less than $350,000 by late August. "As a result of our financial controls in place, we have leveled the peaks and valleys of our cash flow, thereby ensuring that our bills are paid in a timely manner, getting completely away from financing our debt with credit cards," Danzey wrote in his AllBusiness.com blog.

Guardian's success has been so dramatic, in fact, that Danzey is exploring the possibility of doing contract billing work for other physician practices to produce another revenue stream.