When to go out on a limb
You don't have to avoid accounts receivable altogether-just be smart about when to offer credit and who you offer it to.
YOU'VE HEARD THE EXPERTS SAY, "DON'T LET clients charge," "Reduce your accounts receivable," "Letting clients charge is a bad idea." But accounts receivable isn't necessarily a problem. If you let clients charge and they pay their bills and the service charge, you're not only making money—you're making money on your money. Isn't this what banks do? The biggest building in your city is probably a bank building; I figure they must be doing something right.
In fact, you may be causing bigger problems by not allowing clients the opportunity to charge. How many times has your team suggested a dental procedure, only to hear the client say, "I can't afford that care right now; I'll take care of it later in the year." But the client doesn't usually schedule it later.
Illustration by Alison Fulton
Instead, when he or she comes back the next year for the pet's annual physical exam, you find the pet has lost weight and has severe periodontal disease, or worse yet, an abscessed tooth.
What if you could say, "I understand that you may not be able to pay for the service today. We do offer credit terms to our valued clients. Let me ask our office manger to discuss the options available to you." This approach leads to better care. Plus, you're saving clients money in the long run by addressing health issues before they become critical. And your practice earns revenue.
Of course, you need to be smart about when and to whom to extend this privilege. And you need a reliable system for following through and making sure you get paid.
Consider an outside service
The first decision you need to make is whether you'll extend credit yourself or use an outside vendor. You can outsource this service either to a company that serves only the veterinary industry or an out-of-industry vendor. Many local banks also will work with you to set up a client-lending program.
Using an outside service has advantages: You don't have to investigate a client's creditworthiness. You don't send the monthly bills. You're paid immediately. And if the client fails the credit check, it isn't your practice that refused him or her, but the outside service.
First collection letter
The downside of using an external service is the cost to the practice and the client. But in most cases you'll pay only a little more than you would if the client used a credit card.
If you decide to offer credit internally, I recommend that you put one staff member in charge of this process—and make sure you give that person the appropriate training. Many rules and regulations apply in the credit and collections world. So appoint someone who's interested in doing this job and send him or her to high-quality continuing education courses. You'll find many one- and two-day courses available.
Of course it's important to know whether the client is a good credit candidate. To help you decide, join your local credit bureau. As a member, you can submit requests for credit reports—with clients' permission. These reports give you all the information you need to decide whether the client meets your criteria for extending credit.
Enjoy the benefits of billing
Now here's the part where you can make money on top of your money. You decided that the client was credit worthy. Now you'll send statements, charge a service charge or billing charge, and collect payment. If you're charging 1 percent to 1.5 percent per month—or 18 percent a year, where else are you going to get a guaranteed return on your investment that's higher?
Naturally there's some risk involved. If a person defaults on their payment arrangement or files for bankruptcy, you've got a problem. Such is the world of accounts receivable.
Define your approach to collections
No matter how carefully you screen clients before you extend credit, there'll always be one that surprises you. Just look at banks. They're supposed to know what they're doing, and sometimes their clients default and file for bankruptcy. The key is to not overreact.
Final collection letter
Managers, and sometimes owners, spend too much time on the collection process. To wade through the situation effectively, you need to develop a written collection policy, so you know exactly what you'll do. Here's a sample:
1. Our team will send a statement on the first of the month. We'll assess a service charge of 1.5 percent per month, or 18 percent a year, or a minimum service charge of $4.50.
2. If the client doesn't pay after 30 days, we'll send a second statement with the first collection letter and assess a second service charge.
3. If we don't receive payment after 60 days, we'll send a second and final collection letter with the statement and assess another service charge. This final collection letter will demand payment in full within 15 days of the date of the letter.
4. If the client fails to make payment 20 days after the final collection letter is sent, we'll call him or her and demand payment in full. At this point, we'll give the client 15 days to make this payment or to sign a satisfactory payment contract.
5. If the client fails to make payment or satisfy the payment contract within 15 days of our call, we'll refer the account to an outside collection agency or lawyer.
If you've worked the account for 120 days without collecting, you aren't likely to see payment. At this point, you need to hand the case off to an expert. Yes, this approach costs money. But so does the time your team spends on collecting. No hospital employee should spend time in small claims court; that person has more important things to do in the practice. Collection agencies and lawyers work in this domain. Let them handle it.
Lighten up for good clients
Let's say you just don't want to get into the credit business. You still may want to loosen up your credit policy. For example, what about that client who has come to your practice for years, has always paid his or her bill and now, for some reason, can't pay for your services. In this case, you might still consider finding a way to extend credit.
Too many practices deprive themselves, their clients, and—more importantly—their patients of necessary and important services because they're worried about accounts receivable. The industry standard is that accounts receivable in a small animal practice should be between 1 percent and 2 percent of your gross. Anything over 3 percent is a problem.
I'm more inclined to look at current accounts compared to aged accounts. If your clients pay on their balance and pay your service charge, then there's no problem. In fact, you might want to start looking for some new land to build on— next to your local bank.
Find collection letter templates online at www.vetecon.com.
The bottom line
Accounts receivable can actually let you make money on top of what you're already owed. But you need to take a savvy approach. Start by determining which clients you'll let charge and whether you'll extend credit yourself or use an external service. Then develop reliable systems for billing and collections.
Veterinary Economics Hospital Management Editor Mark Opperman is a certified veterinary practice manager and owner of VMC Inc., a veterinary consulting firm based in Evergreen, Colo. Opperman will speak on behavioral interviewing, assertive management strategies, understanding the role of personality, focusing on key financial indicators, and more at CVC Central in Kansas City, Mo., Aug. 26 to 29. Send your comments or questions to firstname.lastname@example.org.