Managing Money Flow to Safeguard Your Practice

I first met Dr. Don Lewis, an oral surgeon from Cleveland, Ohio, when he was presenting his embezzlement program at the 1996 Orlando ADA meeting. Don told me that one out of four dentists will be, is, or has been the target of embezzlement. He quietly pointed out that my dental booking program, which I had been presenting for the previous 20 years, neither did justice to my material nor raised the consciousness of dentists to the potential of embezzlement. Since then, Don and I have been working closely together to raise dentists’ consciousness about the grow­­ing problem of employee embezzlement and fraud in their practices.

To eliminate embezzlement in a dental office takes prevention and detection. Two of my previous articles in Dentistry Today focused on uncovering embezzlement. This article is one of two articles on embezzlement prevention. To prevent embezzlement, a dental prac­­tice needs well thought-out booking control systems. It further requires that the dentist take a few minutes each day to oversee the day’s financial activities and, on a monthly basis, to read the practice’s major reports and follow key audit trails. This article covers the correct way to process practice payments. 

Organizing and recording patient and insurance payments effectively not only protects against embezzlement, it also ensures that the practice’s accounts reflect its financial activity accurately. Here are some guidelines for managing money flow in a way that safeguards your practice. 

ACCEPTING CASH PAYMENT REQUIRES YOU TO MAINTAIN A CHANGE FUND
For patients who want to pay cash for services, Basic Accounting 101 requires a dental office to maintain a cash change float at the front desk. This fund allows staff to make change for a patient in a quick and professional manner. The float is created by issuing a business check for $100 made payable to “fund cash change account.” The check is presented at the bank, and the $100 received (ask for a combination of $1, $5, and $10 bills) is used to establish the change fund. When the books are reconciled at the end of each business day, the cash on hand should add up to the amount of cash paid by patients that day plus the $100 float. The cash received from patients is banked daily, leaving the $100 available to make change on an ongoing basis. Doctor, the $100 won’t be returned to the practice until the day you retire or sell the practice, whichever comes first! By the end of the week, the $100 will often consist of five $20 bills. Before the office opens on Monday, these notes should be exchanged for a mixture of $1, $5, and $10 bills so that making change is simple for the staff and the patient.

There are a number of benefits to establishing a cash change float: 
  • Staff and doctor’s personal money is not mingled with the practice’s money.
  • Mistakes are easily discovered when balancing at the end of the day.
  • It saves staff time and portrays professionalism to the patient and, most important, a clear audit trail is established for cash coming across the counter.

If there is any disadvantage to using a change fund, it is that someone must remember to start each week with a stack of singles, fives, and tens.

DAILY RECONCILIATION OF CASH
Whether you are a sole proprietor or a corporation dictates how your daily cash payments must be handled at the end of the day. In corporations, doctors may not treat incoming cash payments as their personal onsite ATM. As officers of the corporation, doctors receive a regular salary. The cash belongs to the corporation and must be banked, along with the checks, on a daily basis.

Nonincorporated doctors who are sole proprietors have some flexibility about how cash is handled. Ideally, the CPA has established a regular salary for doctors, as this is the best way to work within a budget. For doctors receiving a salary, the cash is therefore deposited daily in the same manner as for the incorporated doctors. If, for a variety of reasons, the CPA has not been able to project your income stream yet, you are not able to draw a regular salary. In this case, doctors may wish to take the cash paid by patients out of the practice rather than traveling to the ATM. This method is quite acceptable as long as good bookkeeping guidelines are followed. Here’s how the process would break down: 
  • Monday, December 10th: Cash paid by patients = $200
  • Change fund on hand = $100
  • Total cash on hand = $300
  • Change fund maintained at $100
  • Cash available to doctor = $200.
If you follow this practice, have your staff prepare a business check in the amount of the available cash, made payable to “Cash Receipts.” After you sign the check, return it promptly to the staff to be included in the day’s deposit. You have now established a strong audit trail by replacing the cash you are taking with a check for the same exact amount. You take the cash, the check is deposited, and the transaction results in a zero line item, providing an undisputed audit trail. You will need a new category code, “Cash Receipts,” for your chart of accounts. Your monthly general ledger report will now reflect all your cash withdrawals under one category; the total should equal the cash amount patients paid into the practice that month.

As an owner/employer, you derive several major benefits from this system. First, if the IRS conducts an audit, your accounting protects you from any hint of impropriety. Second, with dental office embezzlement on the increase, it is essential to show your staff that you are well informed about how incoming cash is processed. Staff should be educated to know that the practice will not tolerate fuzzy bookkeeping. Third, this system helps you and your CPA to account for the exact amount of cash you are taking out of the practice, and thus reflect it accurately in your budget.

As a sole proprietor, you must decide whether to bank cash from patients daily or take it and replace it with a cash receipt check. It is not appropriate to jump between the two systems. If your decision is to bank the cash daily, you may not borrow cash and replace it with an IOU note. Cash should not be left in the office overnight. 

A NOTE ABOUT PETTY CASH
When I present my Internal Control program at conferences, I always poll my audience to see how many practices have installed a cash change float for making change. I find that the vast majority of practices, in fact, make change from a variety of inappropriate sources, including the wallets of staff or doctor, or the infamous petty cash fund. Too many dentists keep $200 or more on hand in their petty cash fund. In most cases, this high amount is required because the practice makes change for patients out of petty cash, instead of using the money to only pay the mail carrier or other small emergency expenses that come up during the business day. Once a cash change float is established, keeping a large amount in the petty cash fund is no longer required or recommended.

Most dental offices should be able to do business effectively with a petty cash fund of $25, which might require replenishment every 2 months or so. Petty cash is acquired by writing a check payable to “Fund Petty Cash,” cashing it, and processing it as a nontaxable expense. The expenses the money is used to pay for are captured as tax deductible, when coded by category when the account is balanced each month. A journal entry captures these costs and, with the correct coding, posts them to the appropriate category. The monthly balancing of the petty cash becomes a very simple procedure. It needs to be emphasized that the petty cash fund also should not carry any IOU notes from the doctor. 

PROCESSING PATIENT CHECKS
Checks are received and recorded in an easy five-step process:
(1) Make sure the payee name (the doctor’s or practice name) is filled in correctly.
(2) Stamp the back of the check with the endorsement stamp.
(3) Credit the payment to the patient’s account.
(4) If the payment is made at the time of service, give patients the top copy of a two-part duplicate charge/receipt slip.
(5) Enter check onto the daily deposit slip.

BENEFITS OF ISSUING CHARGE/PAYMENT RECEIPTS
Health providers need to protect their practice income by insisting that charge/receipt slips, numbered and in duplicate, are used in their offices. (Your office may call this form a routing slip, walkout statement, superbill, etc.) This form conveys to patients the charges they incurred in the office that day, as well as any payments and adjustments made to the account. Most slips also carry information about the next appointment. How the charge/receipt slip is created in your practice will be determined by your computer software company’s design and whether or not you enter all needed treatment into the computer prior to the appointments.

Here are the benefits of using the charge/receipt slips:

 

  • Inform before you perform. Patients who leave at the end of each visit with a total breakdown of charges/payments/adjustments will not be unpleasantly surprised when receiving the monthly statement.
  • Stop embezzlement. Cash is the favorite currency of the embezzler. Duplicate charge/receipt slips, numerically numbered, are issued for each patient. The system creates a very effective foundation for the kind of solid internal controls that make embezzlement much more difficult for employees.

DOCTOR’S 5-MINUTE DAILY FINANCIAL AUDIT
I work very hard to establish management systems that do not require the dentist to be involved with management every few minutes. However, Dr. Lewis and I are adamant that doctors take the responsibility to do a 5-minute audit of each day’s financial activity. Ask your staff to place each day’s charge slips, in numerical order, on your desk before you leave. So that you do not alienate the staff and imply a sudden lack of trust on your part, the following script offers an easy way to implement this system.

“Mary, I need to make sure that the dentistry I produced today was billed out correctly by me and my clinical staff. From tomorrow on, I need to have all the charge slips, in numerical order, including voided charge slips on my desk before ___pm each night. Before I go home I will double check that we charged out the dentistry performed each day.” 

POSTDATED CHECKS
Historically, healthcare providers have found postdated checks to be an excellent method to facilitate collections. In recent years, some employees have told me that taking postdated checks is illegal. This is not true. What is true is that when you accept a postdated check, if and when a bank returns it to you for insufficient funds, the law does not support you as strongly in making a claim against the patient as if you handled delayed payments in the following manner.

Even though a check will not be deposited until some days or weeks in the future, it should be dated with the day when it is written, not with the future date of deposit. I recommend that this check be termed “check being held for future deposit.” Should such a check bounce, you will be able to use the full range of legal collections methods for bounced checks. 

To be legally in compliance, your staff should no longer use the term postdated check. Neither should they request that patients write a check for you to hold for a future date. Rather, your staff should wait for patients to inquire about whether the practice will take a check and hold it for future deposit.

Federal law requires that patients must get written advance notification (3 to 10 days in advance, depending on your state) of when this check is to be deposited. To simplify patient communication on this issue, ask patients which notification method would work best for them, fax or e-mail. Create a generic-mail attachment or paper fax form, which can be customized for the specific details when needed. Dis­patch this communication in the time frame that meets your state’s requirements.

All patients should leave at the end of each visit with a receipt showing the day’s charges, payments made, and any adjustments made. When accepting a current check to be held for future deposit, the payment cannot be credited to the patient’s account that day, nor can it be processed through the computer and generate a receipt. I therefore recommend reverting to the old-fashioned manual receipt system. Office supply stores stock small, numbered, three-part receipt books that can serve your needs very well. The receipt should include the following information: 
  • Patient name and account number
  • Today’s date and the future date check will be deposited
  • Check amount and check number.

Once the receipt is filled out, the top copy is detached and given to the patient. The middle copy is stapled to the front of the check and placed in a “checks being held for deposit” envelope in the cash drawer, with the future deposit date highlighted in a bright color. The third copy remains in the receipt book as the master copy. This manual receipt system works extremely well when staff make collection calls and patients offer to send in a check to be held for future deposit. When the check is received, it can be processed through the manual receipt book system. Staple the top copy of the receipt to the front of the check being held, and mail it back to the patient so that it arrives within 3 to 10 days before you deposit the check. You are now in legal compliance with the notification needs of your state.

PAID IN FULL
When processing patient checks received through the mail, it is quite usual to find that a patient has written “Paid in Full” on the front of a check. The patient will have made this notation for one of two reasons: 

(1) Patient genuinely believes the amount of the check takes care of the outstanding balance and makes the notation to remind themselves and the practice of this fact.

(2) Patient perceives that the amount being billed is not accurate, or that there is some room for interpretation of the stated amount due. Checks received in the practice marked “Paid in Full” need to be handled carefully to protect the practice both legally and financially. If the practice acknowledges that the amount of the check correctly covers the outstanding balance on the account, the check is processed.

However, if the staff perceives the check amount to be less than the outstanding balance amount, attorneys advise us that the best, safest, and most legally correct way of handling this payment is to return the check to the patient. The patient is informed that the check does not cover the owed amount and payment in full is requested. 

 

If, however, the patient from whom you have received such a check is a good patient of record, there is potentially another option available. Staff could call the patient and address the issue, and remind the patient of the balance still remaining on the account. At this point staff will either agree to accept the check as payment in full, and the account is credited for the difference, or the second option requires the practice to advise the patient that the check marked “Paid in Full” is actually a partial payment. The patient agrees to mail the balance, and I suggest you hold the first check until the second check is received, and then bank both checks together. The patient must also agree to have the “Paid in Full” notation crossed out. A copy of the corrected check is made for the patient’s records, and a second copy is sent to the patient, either by mail or fax. To repeat, such action is only advisable when working with patients of record with whom the practice has a good relationship. If there is the slightest doubt that the patient would misunderstand the changing of the “Paid in Full” notation on their check, return the check to the patient. It is better to be safe than sorry. 

PROCESSING INSURANCE PAYMENTS
I highly recommend posting all insurance payments to patient accounts so that they include the insurance carrier’s name and the specific family member who received treatment. For example, “12/10/01 Great West Life insurance payment Mrs. J $400.” This system maintains a clear audit trail of incoming insurance income and allows for easy detection of posting errors. When a family has more than one insurance, it is easier to track the primary and secondary insurance payment history. It is also simpler to identify accounts that have been incorrectly credited with insurance payments belonging to other accounts. Additionally, it provides a useful record of insurance payments paid in error on a predetermination claim. This latter situation happens more than most people realize. When the prepayment is received, credit the patient’s account and bank the check. It is then necessary to inform the insurance company of this action and to advise the carrier that upon completion of treatment you will submit a claim for rendered treatment to which the prepayment will be credited. The patient’s account might read: “12/10/01 Great West Life predetermined payment Mrs. G $1,000.”

TWO-PARTY INSURANCE CHECKS
Depending on the policy purchased by the employer or union, an insurance company may issue a check made payable to both the provider of the services and the patient. Although these checks may be sent to the practice, they are usually sent directly to the patients. These payments must be handled correctly to avert IRS review. Here are some guidelines:

  • The patient must endorse the check to the doctor/practice. The check is then deposited into the practice account, and the patient’s account is credited for the full amount.
  • Staff should analyze the patient’s account to determine if any of this payment belongs to the insurance company (the insurance companies do make errors!) or has created a credit balance that should be refunded to the patient.
  • If a refund is due to the patient, check to see if there is any outstanding treatment needed for either the patient or family. If this is the case, a telephone call may motivate the patient/family to use the credit toward the needed treatment.
  • If the patient is due the money, a refund check is prepared and mailed to the patient with an appropriate note. 
I continue to hear of practices in which the doctor endorses two-party checks over to the patient. Mis­handling co-payee checks will almost automatically trigger an IRS audit. Every January and February, you receive copies of 1099 forms from insurance companies; the originals go to the IRS. The IRS has made it very clear that they match all 1099s from insurance carriers against a doctor’s personal 1040 tax return or the corporate tax return. If the total annual income reported to the IRS by the insurer is higher than the total income reported on the sole proprietor’s or corporation’s tax return, the IRS will want to know why. By processing two-party checks through the doctor/practice first, the income is captured on the books as gross income. Refunds are listed as a line item, and deducted from gross income to realize an adjusted net income before expenses.

SUMMARY 
Whether payments for service come in the form of patient cash or checks, or insurer payments, it is paramount that a doctor implement a strong accounting system to disclose all daily financial transactions. It is also essential that a strong audit trail be part of this accounting system. By taking a few minutes at the end of each day to do the necessary review, dentists protect their income and provide one of the best protections an owner can have against embezzlement. Let the staff know you are on top of the books!


Ms. de St. Georges is an internationally renowned dental practice management educator and a member of the National Speaker’s Association. She serves as a contributing editor for Dentistry Today, the first nondentist to be named to this position. She maintains JdSG International in Monte Sereno, Calif, and can be reached at (408) 354-4144 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it


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