Imagine that you are the CFO for Milwaukee Surgical Supplies, Inc. from problem 16.5. After performing the calculations requested by the problem, you have been asked to write a memo identifying whether the results indicate that receivables management are a strength by comparing these results to that of a competitor. (Use Home Infusions calculations for ACP and Receivables balance on page 584 of the text as the competitor.) In addition, please offer suggestions as to how Milwaukee Surgical could improve its ACP and Receivables balance in the future through the use of additional discounts or other strategies that you believe would be effective.
***Competitor is Home Infusion, exhibit 26-3
**identifying whether the results indicate that receivables management are a strength of Milwaukee by comparing these results to that of a competitor...Is Milwaukee stronger than Home Infusions?
in assessing performance. The total amount of accounts receivable outstand- ing at any given time is determined by two factors: (1) the volume of services provided and (2) the average length of time between services and collections For example, suppose Home Infusion, Inc., a home health care business, begins operations on January 1 and on the first day starts to provide services to patients billed at $1,000 each day. For simplicity, assume that all patients have the same insurance, that it takes Home Infusion two days to submit patients' bills, and that it takes the insurer another 18 days to make the pay- ments. Thus, it takes 20 days from delivery of service to receipt of payment At the end of the first day, Home Infusion's accounts reccivable will be $1,000; they will rise to $2,000 by the end of the second day; and by January 20, they will have risen to $20,000. On January 21, another $1,000 will be added to receivables, but, assuming that the insurer pays the full amount for services provided 20 days earlier, payments for services provided on January 1 will reduce receivables by S1,000, so total accounts receivable will remain constant at $20,000. Ifeither patient volume or the collection period changes the amount in accounts receivable will change Monitoring Overall Revenue Cycle Performance If a service is provided for cash, the payment is received at that time, but if the service is provided on credit, the payment is not actually received until the account is collected. If the account is never collected, the payment is never received. Thus, healthcare managers must closely monitor receivables to ensure that they are being collected in a timcly manner and to uncover any deterioration in the quality of receivables. Early detection can help managers take corrective action before the situation has a significant negative impact on the organiza- tion's financial condition. (Receivables quality is defined as the likelihood that the receivables will be collected in a timely manner and without losses.) The common approach to monitoring revenue cycle performance, both in the aggregate and by specific activity, is by using metrics. Generically, a metric is a single quantitative indicator-usually a ratio-that can be used to measure the performance of some process. The primary purpose of metrics is to monitor performance and aid in the identification of corrective action plans if performance is subpar. In this section, we discuss two metrics that monitor overall revenue cycle performance: average collection period and aging schedule. Average Collection Period Suppose Home Infusion provides an average of ten home health visits a day at an average net charge of $100 per visit, for $1,000 in average daily billings (ADB). Assuming 250 workdays a year, the company's annual billings total $1,000 250 = $250,000. Furthermore, assume that all services are paid by two third-party payers: One pays for half of the billings 15 days after the service is provided, and the second pays for the other half of billings in 25
