Deal or no deal?

March 21, 2012

Dental practice management software has become ubiquitous. Most practices today are computerized at some level, whether they are using computers simply as an internet portal or facilitating the completely paperless office. Dental practice management software is useful on a daily basis in addition to becoming increasingly critical in the evaluation of a purchase opportunity. Here’s how.

Dental practice management software has become ubiquitous.

Most practices today are computerized at some level, whether they are using computers simply as an internet portal or facilitating the completely paperless office. Dental practice management software is useful on a daily basis in addition to becoming increasingly critical in the evaluation of a purchase opportunity. Here’s how.

When we are asked to value a practice we look for the reports that are available from most of the commonly used programs. Those statistics are utilized to evaluate the health of a practice and provide important information that purchasers require when they evaluate their interest in purchasing a practice.

Further, practice acquisition lenders request the same, if not additional reports, to decide whether they will finance an acquisition. As the adage says, "garbage in, garbage out" meaning the accuracy of any computer report is limited to the accuracy of the information that is entered and maintained. In valuing a practice we try to interpret and verify the reports with as much data as available.

As an example, prospective purchasers and lenders both want to know the number of active patients in the practice. But, what is the definition of an active patient? Generally, we look at the number of patients treated by the practice in the last 18 months.  This time window has been an accepted standard for years, however, practice software reports will not usually show that number anywhere. 

Most offices that still use paper charts do periodic chart audits and move patient records to storage when the patients have not been in the office for approximately 2-4 years. However, when the inactive charts are removed, the practice software is not usually updated. 

Patients need to be deactivated (set to “inactive”) in the software or they continue to be counted as “active,” erroneously, in the patient register. We often see practices with 3,000-10,000 patients on patient statistics reports but only 2,000 patient charts in the office. It is unlikely that there are more than 5,000 active patients in a general practice with two hygienists working five days per week. That ambiguity generally leads to more questions and research to ascertain the true patient census. In most cases, even 2,000 patients may be overstated and is often “too many” for a solo-practitioner.

Another report that we have seen overlooked is the accounts receivable (AR) report. If you want to know how a practice is doing financially, look at this report. How much dentistry was produced and how much money was collected? Overhead costs are actually a function of the production of the office and not the collections. A practice’s overhead may seem to be too high when compared to the collections, but evaluating its overhead relative to its actual production may reveal a significantly different perspective.

We have seen offices where the accounts receivables approach $500,000 and more. How does this happen? If the practice owner does not regularly review the status of the patient accounts and continuous errors are not corrected over time this can lead to an exponential error. Why is that a problem? At the time of the sale of the practice, the seller will be required to disclose the amount of money owed to or by the practice. 

The accounts receivable is a compilation of actual money owed to the practice by patients and insurance companies (if claims are submitted for patients) and the amount of patient credits which is the total of patient overpayments, most likely due to duplicated payments by insurance companies and patient prepayments for dentistry not yet performed. Long-standing errors are usually going to be seen in the aged collection report and probably in the over 90 or 120 days column.

If a practice does not regularly review this report a seller could find him/herself at the closing of the sale of the practice writing checks to patients to refund overpayments (credits) or transferring money to the purchasing doctor to be held for the patients to return to the office (prepayments). In either situation, it can be a real problem as sellers have had to return tens of thousands of dollars in order to sell their practices. Those using Care Credit and other prepayment sources must also realize that this "income" is actually a prepayment for services due and could cause money to be due to patients that would need to be accounted for.

Practice owners should look at the accounts receivable report and if the balance or amount of credits is excessive, they may find that the office software has not been properly closed at the end of each month or at the end of the year, for many years.  The only way to rectify that is to have the practice administrator go back and close each month individually until the software is up to date.  The seller will also need to either write off very old and/or uncollectable accounts and remove them from the practice management software or send them to a collection agency.

Whether you are contemplating selling your practice or are in the process of searching for a practice to purchase, you should consult with your transition expert to discuss the relevance of the practice reports.