You would have to have your head buried deeply in the sand to not recognize the potential for an unprecedented slowdown in receivables turnover as the Patient Protection and Affordable Care Act marches toward full implementation. The importance of having a plan in place to mitigate this potential problem cannot be overstated.
It is incumbent on the CFO of every healthcare enterprise to ensure that accounts receivable managers have established relationships with invoice financing companies, factors and other alternative lenders as a backstop to the inevitable payment delays that will be the likely hallmark of the ACA.
Making the case
Few would argue against the premise that when invoices are due from any government entity, timely payment of the receivable is rarely an outcome. While no one can know with certainty how this will play out long-term under the ACA and what levels of delay will be experienced, the responsible course of action is to prepare for a worst case scenario.
As CSImarket.com’s quarter-over-quarter healthcare sector statistics demonstrate, receivables turnover ratios are worsening while, concurrently, inventory turnover ratios are dramatically improving. We all know what this signals! The writing is on the wall and must not be ignored.
If cash flows do not keep pace, from what sources will the capital to replenish inventories come?
Global risk management firms, such as AON Corporation, recommend alternative financing as a viable strategy. Moreover, alternative financing answers the call for the widest variety of healthcare organizations, including hospitals, diagnostic facilities, pharmacies and home health providers. And the most commonly used alternative financing service is invoice financing, more specifically, factoring.
Factoring facts
Factoring has two principal variations: recourse and non-recourse factoring. By far the most popular is recourse factoring. Establishing a business relationship with a factoring firm is a remarkably simple and straightforward process. In many cases, factoring firms have personnel with backgrounds in the healthcare industry. These professionals understand the healthcare business and they understand its unique requirements. Here is a brief synopsis of the steps necessary to establish a factor relationship:
- Select two or three factoring firms with expertise in the sector
- Make the prerequisite comparisons which include: (a) Fees; (b) Turnaround time; (c) Percentage of advance
- Submit requested documentation (almost certainly an easier process with a factoring firm than with a conventional lender)
- Submit invoices
- Receive cash within 24 to 48 hours
It may sound too good to be true, but for compelling evidence, take a look at the construction, freight and transportation industries. Factoring has played a predominant role in those sectors for decades. Factoring firms are uniquely positioned to offer these same benefits to the healthcare industry.
Shop around
Recognizing the need for comparison-shopping, bidding platforms have been developed to facilitate this for interested businesses. These one-stop-shops are readily available on the web and can make the selection of a compatible factoring firm even easier.
Invoices from government entities lend themselves quite well to recourse factoring because, although notoriously slow to pay, they are all but guaranteed to pay in the long term. Recourse factoring offers the best return for customers of factoring firms. By recourse factoring, we mean that in the event an invoice cannot be collected, the company will buy it back; conversely, non-recourse factoring shifts the burden of potential loss to the factoring firm and advances/fees will reflect the increased risk.
Documentation required to submit invoices to a factoring firm for advance payment is simple, largely because the factoring firm relies on the creditworthiness of the business’ customer, not the business itself.
Most factoring firms will conduct business electronically. As a result, submitting invoices, receiving payment and other related transactions can be accomplished quickly, with limited disruption to a customer’s normal business process.
Responsible management in any business is defined, in part, by having prepared for worst-case scenarios in all facets of its operations. Advance preparations for a cash flow crisis are critical. Alternative lenders can provide unique solutions to these problems and prudent managers will have a “plan B” in place.