What percentage of your new case starts pay in full at the beginning of treatment?  What is the average down payment you receive on your case starts?  What is the average contract (payment plan) length?  What is the ratio of your Accounts Receivable (A/R) to your average production?  What is the impact on the practice if any of these statistics are outside of a healthy level?  What, in fact, does “healthy” even mean for your particular practice?

The answers to these questions and your ability to reach appropriate goals for each of these statistics play a major role in the health of your receivables and, ultimately, the overall health and profitability of your practice.  Unfortunately, the great majority of orthodontists cannot answer even one of these questions and they have no idea what goals they should have for these statistics.

Overall, the goal is to have A/R that are low enough to be manageable so that your Financial Coordinator does not go home each night and beat her children, but they also need to be high enough to keep the month to month cash flow more or less consistent.  When the A/R relative to production are very low you have no idea what you are going to collect in the near future.  The A/R are low because paids in full or down payments are too high, contract lengths are too low, or you are pushing patients into outside financing.  That might feel good to some doctors but those issues make cash flow suffer terribly in months when production is low during vacation periods or the seasonal periods that reduce production, or just when an orthodontist has a bad month.  Those same four issues (big down payments, too many paids in full, short term payment plans, and pushing outside financing) make case acceptance rates poor!  Most doctors agree they would prefer to have $150,000 per month in fairly consistent month to month cash flow, than to have completely inconsistent month to month cash flow but which at the end of the year still ended up being equal to the $1.8M that the consistent practice generated.

Consider the following real scenario that triggered my decision to write on this topic.  I lectured at the Dolphin user’s meeting last week.  One of the doctors in my lecture sent me his financial policy document (see below) that is currently being presented to his new patients.

We call this document a financial “Option” sheet, a document well known to cause substantial declines in the rate of case acceptance.  No matter which “option” this doctor’s patients/parents choose (and many will choose none and will leave to shop elsewhere!) the result will be huge down payments, short term contracts, and a lot of paids in full because of the outside financing.  That may not sound bad to many doctors but the A/R are going to be terribly low and the month to month cash flow will be terribly inconsistent.  The greatest issue will be, of course, a low rate of case acceptance as a direct result of presenting finances in this manner.

So, back to the original question.  Patients paying in full must be kept at a reasonable level.  Too many paids in full and there are no longer enough accounts on the books and total accounts receivable to keep your month to month cash flow healthy and consistent and you end up being almost completely dependent on new starts for your cash flow.  Too few and you’re A/R will be extremely high creating a significant burden on the Financial Coordinator and, usually, increased delinquency as well.

To keep your receivables healthy, you should keep the number of patients paying in full at a level that is no less than 10% of new starts and no more than 20% of new starts.  Reaching that healthy range is accomplished by keeping the paid in full discount offered at whatever level is necessary.  Our average client in the early eighties, when interest rates were high and the economy was smoking, had to offer 8% discounts (huge!) in order to keep paids in full within the 10%-20% range.  Today our financial world has changed and our average client is offering a 3% discount for paying in full, and many clients are offering only 2%, in order to keep the number paying in full within the appropriate range  It’s a simple issue!  None of your patients are currently earning anything on their savings so a 3% discount on your case fee sounds very attractive.  Also, people are still concerned about the direction of our country and the direction of our economy and they do not believe that being in debt is the right thing right now – so they want to pay in full.  In today’s world (which may change tomorrow!) offering more than a 3% discount for paying in full is simply throwing profit out the window.

The average down payment should fall within a range of 14% to 18% of your average case fee.  You can, of course, require larger down payments but we believe that being flexible with your patients and allowing low or even $0 down payments on qualified patients is absolutely necessary if you are to have the best rate of case acceptance.  How much any individual patient (“A” patients!) pays for a down payment is not important.  What is important is what the average down payment is on all of your starts.

The average contract length also plays a significant role in the health of the A/R and, of course, in your cash flow.  Orthodontists that do a lot of long (22+ months) treatment times are, typically, going to have longer payment plans which will result in a higher ratio of A/R to their production.  That’s not necessarily a bad thing when you consider that most practices in that situation have better case acceptance because those long treatment times result in lower monthly payments – translation “more affordable!”

We goal our clients to have average payment plans that are 90% of the average diagnosed treatment times.  It is important to pay attention to the word “average.”  It is perfectly OK for a client to have 10 new starts in a row with a payment plan length that exceeds the diagnosed treatment time (as long as those patients were strong “A” type patients) as long as the overall average contract length was at that 90% of treatment time level.

So you now have the goals for the percentage of patients who should be paying in full, the average down payment for those who finance, and the average contract length for those who finance.  The last statistic I mentioned is the ratio of the A/R to your production.

If you keep your paids in full, your average down payment, and the average contract length within the goals I have mentioned, it is your average diagnosed treatment time that determines what ratio of receivables to production is perfect for your particular office.  For instance, two orthodontists with equal monthly production, whose paids in full and other financial arrangement statistics meet the goals I just mentioned, will have entirely different A/R and an entirely different A/R ratio depending on the length of their average treatment.  A practice doing a lot of Invisalign, SureSmile or other short term treatment technologies will have a receivables ratio that would typically be equal to 4.0 months of average production because of short term payment plans.  A practice with the same production but doing a lot of lingual or other types of cases that traditionally take 24+ months to complete would typically have an A/R ratio of 6.0 months of average production because of the much longer term financial arrangements.  In both cases, the ratio of receivables to production would be healthy for these two practices.

Our average client nationally has an average diagnosed treatment time (including full starts, partial starts, PH I starts, Phase II starts, etc.) of 21.0 months.  Because they have healthy financial arrangements as described above, their A/R will be equal to 5.3 to 5.5 months of their average gross production.  They will have consistent month to month cash flow, and their Financial Coordinator will be able to handle the account load with relative ease.