Revenue Recognition: Are You Collecting 95% of Booked Revenue?
By: Charles Lager, Rock Pond Solutions
Do you know the quality of the Revenue that your business is recording each month? If your answer is “I am not sure” or “You bet, we sold it thus it must be good”, then you are running the risk of managing your business blindly.
FASB Concepts Statement No. 6, Elements of Financial Statements, defines Revenue as “inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations”.
I am confident most of you reading the above statement are asking how this affects my Home Infusion business. For Home Infusion organizations the patient service revenue is recorded when the service is provided. Collectibility is a key criterion for Revenue Recognition. Revenues for Home Infusion services usually are recorded in the accounting records on an accrual basis at the provider’s full established rates. The provision for contractual adjustments (that is, the difference between established rates and third party payer payments) and discounts are recognized on an accrual basis and deducted from Gross Service Revenue to determine Net Service Revenue.
If collectibility is the key criterion for revenue recognition, then how do we assure our business that what we book as Billed Revenue is collectible? It begins with Patient Intake, the demographic and financial responsibility portions of your software intake screen must be completed accurately. There is the age old saying in this business that “if you do it right upfront the first time, then you have a great chance of collecting on the patient service receivable”. I have visited numerous organizations that don’t recognize the importance of the Customer Service Intake process and hence they wonder why they have an Accounts Receivable problem.
As the article title suggests: Are You Collecting 95% of Booked Revenue? , actually translates into the following; that 5% of your booked revenue is placed in reserve for bad debt allocation each month and you are expected to collect the other 95%. How are you going to measure your success toward this goal? Rock Pond Solutions has developed the following reports to assist in monitoring your organizations success in achieving the 95% collectibility goal.
The following two reports are available through Rock Pond Solutions Home Infusion Report library service.
The Collection Velocity Report below shows cumulative cash collected and % by the number of financial periods from the bill date. The example below indicates that the organization has collected 82.42% of its Expected (Booked) Revenue for January 2006. After 7 months, that is well below the target goal of 95%. This is an immediate flag to management to ask what is happening with the other 13% of receivables related to the 95% goal.
The Cash and Adjustment Analysis Report will provide the answers to the questions generated from the Collection Velocity Report. It details the activity for any one month that you wish to evaluate. In this example, February 2006 depicts the total cumulative amount collected and how much was collected in the subsequent months by month. Beyond that it details the adjustments taken by month and indicates the adjustment reasons as set up by the organization. Our example shows that this organization collected 95.11% of their Net Expected Revenue which is within acceptable goals.
The life blood of any business is Positive Cash Flow, that is, Bringing in more Cash than you spend. If a businesses Income Statement (Profit & Loss) consistently shows an Operating Profit each and every month, but its Accounts Receivable continues to age and Cash is always tight, then there is a strong indication that there is a Revenue Recognition or Collection Department challenges.
The examples of the above reports are just some of the valuable tools that can be utilized to stay on top and be a winner in this very difficult healthcare industry.