What is Your Accounts Receivable Balance Telling You?
To effectively manage your pharmacy business, you must understand what your accounts receivable data is telling you. Poor management of your accounts receivable can result in cash flow problems. Successful accounts receivable management includes a process to review your accounts receivable on a weekly or monthly basis.
The first step in reviewing your accounts receivable is to obtain an aging report from your accounts receivable software. This is a report that lists all your accounts receivable and shows the aging of each receivable (current, 30 days, 60 days, 90 days, 120 and over). In reviewing this report, you should be focusing on all accounts 60 days and over. Once accounts age 60 days, it is important to start making calls. You may need to call the customer to ensure the insurance information in your system is correct, or you may need to call the insurance company to ensure the prescription was billed correctly. If phone calls do not produce a result, friendly reminders by letter are the next step. Once all your efforts are exhausted, it is time to turn the account over to collections.
Another quick way to monitor the overall health of your receivables is through ratios. These should be examined monthly.
One of the easiest ratios to calculate is Accounts Receivable as a percentage of Sales. This is calculated by dividing the total accounts receivable balance at the end of the month by the prescription sales for the month. The typical range for this ratio is 50% to 70%. A higher percentage could indicate that you need to collect more aggressively.
A second ratio that can provide you with a monthly assessment of your accounts receivable is the calculation of Days sales in Accounts receivable. This formula tells you how many days it takes you to collect 100% of your accounts receivable. The industry average is 10 to 15 days. The calculation is as follows:
Accounts Receivable at the end of the month
(Prescription Sales for the month/average days of sales)
For example, if your accounts receivable balance at the end of the month is $87,000 and prescription sales for the month (24 days of business) is $305,000, your calculation is as follows: $87,000/($305,000/24) = 6.85 days sales in accounts receivable.
As long as accounts receivable are sitting on the balance sheet, they are not putting cash in your pocket. Therefore, good business practices dictate that you closely monitor your accounts receivable to produce the best business results that you can. If you find you are low on cash, this is one of the first places to look.