This document discusses accounts receivable (AR) and cash flow management in dental practices. It explains that there are three types of AR: gross fee-for-service, adjusted fee-for-service, and net fee-for-service. The distinction between these types is important for understanding actual revenue and cash collected. The document emphasizes that cash collection is vital to practice profitability and success. It recommends carefully monitoring AR reports, using accurate practice management software, and regularly evaluating merchant card processing to maximize cash flow. Increasing cash collections by just 3% in a $1 million practice could add $30,000 to the bottom line.

1. NORTH TEXAS DENTISTRY | www.northtexasdentistry.com14
F
rom a banker’s perspective the single
most important aspect of a dental
practice is how efficient that practice
generates billings and turns those billings
into cash. The conversion from accounts re-
ceivable to cash is a critical dynamic of a
profitable dental practice and can success-
fully be mastered by understanding and im-
plementing a disciplined approach to
collections.
Accounts Receivable
The Accounts Receivable (AR) balance rep-
resents money owed for services rendered
but not yet collected by the practice. The
AR report should be monitored routinely.
There are two types of accounting meth-
ods: accrual and cash. With the main dif-
ference between accrual and cash basis
accounting is the timing of when revenue
and expenses are recognized. The cash
method is most used by small businesses
and personal finances. The cash method
accounts for revenues only when the
money is received and for expenses only
when the money is paid out. On the other
hand, the accrual method accounts for rev-
enue when it is earned and expenses when
they are incurred. The revenue is recorded
even if cash has not been received or ex-
penses have been incurred but no cash has
been paid. Accrual is the most common
method used by businesses. The average
dental practice falls somewhere in be-
tween. Because dental practices typically
have outstanding accounts receivables
from Medicaid, in-network, patient bal-
ances or certain fee-for-service payment
plans, a third accounting method called the
modified accounting method exists. Since
the cash method eliminates AR from the
balance sheet, it is important to ensure that
your practice software can generate de-
tailed AR reports each month. After all, col-
lecting on AR in a timely manner is vital to
the success of your practice. In traditional
commercial and industrial companies such
as manufactures and wholesalers, AR is
recorded as a gross amount. If a manufac-
tures collects less than the amount they in-
voiced, the difference is usually recorded as
bad debt expense. In the dental community
however, it is not uncommon to see three
types of AR.
Gross Fee-for-Service
Gross Fee-for-service revenue is defined as
the full value of services provided to pa-
tients, including Medicaid patients. In a fee
for service practice, the provider sets a
price for the service rendered and bills the
client for that amount. In other words,
gross charges are the dollar amount that
would have been billed to payers if no dis-
counts or other negotiated reductions had
been agreed upon.
Adjusted Fee-For-Service
or Adjusted Accounts
Receivable
Adjusted fee-for-service is equal to the
gross charges less any adjustments. Think
of adjustments as the actual value of the
services performed for which no payment
will be received or expected. A few exam-
ples of adjustments include: charge restric-
tions placed by Medicaid, contractual
adjustments, professional courtesy adjust-
ments, and employee discounts. It is a
good practice to review the adjustments
periodically to ensure that healthy profit
margins are being maintained.
ACCOUNTS RECEIVABLE, CASH FLOW AND
HIDDEN SECRETS OF MERCHANT PROCESSING
by Matthew Caldwell
money matters

2. Net-Fee-For-Service
Net-fee-for-service is the amount that the
practice actually collected from patients
and payers. This is the most important AR
category for a dental practice as this is the
actual cash the practices received for serv-
ices performed. For cash-and modified
cash-basis practices, this amount is simply
cash collections from fee-for-service ac-
counts; net of any patient refunds, or non-
sufficient funds fee and returned checks.
A/R and Collections Issues
The distinction between gross, adjusted
and net receivables is critical to understand
for several reasons. First, the amount of
cash collected is the driving forces behind
your practice’s profitability and success.
Many practices use outdated software or
popular accounting programs that book
revenue on a gross basis at the time serv-
ices are rendered, acknowledging any dis-
count or bad debt expense write offs only
after the cash is received. Utilizing this
method of accounting makes it difficult to
successfully manage a practice. The dentist
may not be able to accurately identify the
actual revenue associated with treating a
specific patient because different payers
may have different negotiated rates for the
same procedure. Dentists have choices in
the particular way they provide services for
their patients. Experience has shown that
when dentists have quality, timely, and ac-
curate information about revenues and ex-
penses for a particular course of treatment,
they can make more cost-effective deci-
sions without sacrificing quality.
Cash flow is the lifeblood of any business,
and dental practices must partner with a
quality banker who understands the pro-
fession and can provide the right advice to
help maximize cash flow and build a prof-
itable, long lasting practice.
Merchant Processing
A few quick points on merchant service
processing. Visa and Mastercard reserve
the right to raise their processing rates
twice a year, usually in the spring and fall.
Have your merchant card processing eval-
uated at least once a year to ensure your
processor is still competitive. Many proces-
sors will raise their fees and place the
blame on Visa and MasterCard. Make sure
you are processing with a reputable ven-
dor. By processing with a reputable vendor
(such as a major bank) ensures that the
software and equipment will meet ever in-
creasingly stringent regulations. Do not
sign contracts with your processor. There
are too many processors that do not re-
quire contracts. Many of the small proces-
sors state that in order to receive a discount
a multiyear contract is required, this is not
the case.
REMEMBER, INCREASING COLLECTIONS
BY 3% IN A $1,000,000-A-YEAR PRACTICE
ADDS $30,000 TO THE BOTTOM LINE.
There is a lot to consider when owning a
dental practice, from making payroll each
week, executing a successful marketing
plan, navigating employee and patient is-
sues to staying current with technical and
scientific advances. Understanding exactly
how much cash your practice collects is
vital. There is a saying in banking, “Cash is
King.” Staying on top of collection will have
a major impact on the profitability of the
practice. In some cases increasing profits
is not about acquiring more patients, or
working more hours, but increasing the op-
erational effectiveness of your current pa-
tient base.
www.northtexasdentistry.com | NORTH TEXAS DENTISTRY 15
Practice Sales & Appraisals
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(469) 222-3200 | ADStexas.com
Jeremy Brown JD, Joe Piazza DDS, Terry Watson DDS, & Frank Brown JD
Matthew Caldwell
is a veteran of the
United States Ma-
rine Corps with over
15 years’ experience
in the banking indus-
try. He has over 10
years’ experience
working with dental professionals in the Dallas/ Ft
Worth area. He primarily focuses on financing
practice acquisitions, expansions and dental office
buildings. In his free time Matthew enjoys cycling,
traveling, photography, and outdoor activities.
Matthew can be reached at 214.525.9049 or
matthew.caldwell@plainscapital.com.