How to Decode Accounts Receivable Aging

In the long-term care industry, it’s imperative organizations constantly monitor the accounts receivable aging (the aging) and follow up on past due accounts. If the aging isn’t appropriately reviewed and analyzed, accounts can become uncollectible, which strains the organization’s cash flows and ability to fund daily operations. In addition, there’s an increased risk errors or fraud could go undetected, causing the financial statements to become misstated. However, quickly and appropriately decoding the detail in the aging can be difficult if necessary background information isn’t known and follow-up procedures aren’t in place.

Key information to compile before reviewing the aging includes a list of basic payors and timeline each should follow for payment after a proper claim is submitted. In addition, it’s essential to understand when past timely filing requirements take effect to prioritize collection efforts. A basic understanding of payor submission time frames and timely filing parameters will provide the necessary knowledge to determine what’s unusual in the aging and the best course of action when unusual items are identified. Using a clearinghouse is recommended for submission of electronic claims to all nonprivate payors versus mailing paper copies. Clearinghouse use minimizes time spent on claim follow-ups, as claim acceptance or rejection is on file transmission and there’s valid support the claim has been received if follow-up is necessary. A clearinghouse also accelerates the collection process.

Once a basic understanding of the fundamental payors is achieved, it’s important to implement a detailed process for regular aging review.

• This review should include all key employees involved in billing and collections, i.e., billers, business office managers, administrators, etc.
• Account review thresholds should be established and communicated to key employees, allowing individuals to come prepared for a productive and efficient meeting.
• A regular meeting date and time should be established and nonnegotiable. All attendees should acknowledge the scheduled review of accounts receivable is critical to proper management of the organization’s cash flows, and the meeting should be held when scheduled each month, not pushed back due to other obligations. It’s important to note: Those responsible for billing claims and subsequent follow-up should have each resident’s account information readily available, as billing and collection notes should be maintained on an ongoing basis. There shouldn’t be significant additional time in meeting preparation.
• Finally, when preparing for—and during—the meeting, specific questions need to be asked to flesh out each identified account’s details, so proper follow-up and collection can occur after the meeting.

These are example responses with specific follow-up questions:

A detailed review of the aging’s value cannot be replaced, but an organization also should use and understand overall benchmarks to evaluate the aging’s health. Important accounts receivable benchmarks include:

• Average days to collect – The average number of days receivables are outstanding. This ratio measures how quickly an organization converts its receivables to cash. A lower number of days is desirable, as this signifies the organization is more quickly converting services to cash.
• Accounts receivable turnover – The number of times receivables turn over during the year. Similar to average days to collect, this is another metric of how quickly an organization converts its receivables to cash. However, a high number is more desirable in this case, as this signifies an organization’s receivables were converted to cash more times during the year.
• Days cash on hand – How long cash on hand can cover current cash expenses. This can be an informative exercise in determining how much it takes to operate the organization on a daily basis.

Download the easy to use workbook to calculate these ratios. Following calculation, a best practice would be to compare results to national or state metrics—or a targeted metric developed by the organization for internal benchmarking.

Decoding Accounts Receivable Tool

BKD has access to historical cost report data, which allows us to provide these national and state benchmarks. Contact your BKD advisor to receive this information or if you have questions regarding this publication’s content.