Ask the Experts: Calculating A/R
When calculating days in accounts receivable (A/R), do you remove credit balance accounts from the A/R aged trial balance (ATB), or do you use the net A/R including credit balances?
Answer 1: I separate active A/R from credit balance accounts in my A/R analysis, including net days in A/R.
This question was answered by: Bob Hoover, FACHE, director, revenue cycle, Meadville Medical Center Health System and is a member of HFMA’s Western Pennsylvania Chapter.
Answer 2: HFMA’s MAP key for net days in A/R excludes credit balances from the numerator.
This question was answered by: Suzanne Lestina, FHFMA, CPC, vice president, client innovation, AvadyneHealth and is a member of HFMA’s First Illinois Chapter.
Answer 3: We reclassify credit balances to accounts payable.
This question was answered by: Christoph Stauder, FHFMA, CPA, president, Stauder Consulting, LLC and is a member of HFMA’s Oregon Chapter.
Answer 4: On the physician/professional revenue side, we have always included credit balances in the A/R when calculating days. The reason is probably because it was easier to use standard numbers out of the system. On the technical revenue side, it has not been included.
This question was answered by: Ruth Landé is vice president, patient revenues, Memorial Sloan-Kettering Cancer Center and a member of HFMA’s New York Metropolitan Chapter.
Answer 5: I agree with all of my colleagues answers. Also, the following should be kept in mind.
It is important to calculate the days of revenue in A/R using two methods each month.
- Gross receivables to gross revenues
- Net receivables to net revenues
The resulting number of days should be approximately the same. If there is a significant difference in the results at the end of a given month, it is likely that there was an error in the process of “netting.” The difference should be investigated and resolved immediately. If this is not done, the valuation of net A/R, a large and very important item on the balance sheet, could be wrong.
In addition, if there is an ongoing trend of the difference in the results moving from a very small difference to a gradually larger difference each month over a few months, this should be investigated. Otherwise, it could be that the same small error is being made, undetected, month after month, with the total value of the errors increasing gradually until there is a material error in the valuation of net A/R.
I have seen two otherwise excellent hospital CFOs lose their jobs because of a significant error in the valuation of net A/R being uncovered during the annual audit by an outside firm. It is likely that they would not have lost their jobs if they had made sure the two methods had been performed each month and if variations in the number of days had been investigated and corrected.
The valuation of net A/R is so important that some CFOs have outside auditors review the valuation of net A/R quarterly to make sure the valuation is correct.
This question was answered by: Robert J. Ellertsen, FHFMA, is a former hospital CFO with more than 35 years of experience in healthcare finance and a member of HFMA’s Massachusetts-Rhode Island Chapter.
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