Bad Debt in Veterinary Medicine

How to handle and avoid bad debt in veterinary practice.

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Bad debt is a problem faced by many businesses, including veterinary hospitals. It refers to the situation when a customer fails to pay their bill, leaving the business with an unpaid balance. This can have a significant impact on a veterinary hospital's profit and loss statement, as it can reduce the overall revenue and increase expenses. In this article, we will explore bad debt in the context of veterinary hospitals and the accounting methods used to eliminate it.

Veterinary hospitals are not designed to offer credit, as they do not credit check or charge appropriate interest. However, there are times when clients may not be able to pay their bills in full, leading to bad debt. This can occur when a client's pet requires emergency treatment or when they are faced with unexpected financial challenges. While veterinary hospitals may try to work out payment plans or offer discounts, sometimes clients are unable to pay their bills.

There are two main accounting methods used to eliminate bad debt: the write off method and the matching principle. The write off method involves removing the unpaid balance from the accounts receivable ledger and recognizing it as an expense. This means that the bad debt is recorded as an expense in the period it occurs. The matching principle, on the other hand, requires businesses to match their expenses with the revenue they generate. This means that if a client's bill is not paid, the expense is recorded in the same period as the revenue. They use a combination of historical experience and math.

Veterinary hospitals typically utilize the write off method to eliminate bad debt. This method is very straight forward. Hospitals are not designed to carry balances, nor to hospitals plan to carry balances. Hospitals are a "pay at time of service" model. Every hospital should do it's due diligence to attempt to get the outstanding balance paid - but as time goes by the likelihood reduces. At 30 days, it is likely the bill will get paid. At 60 days that probability drops to about 50%. Then at 90 days the probability drops again to almost zero. Having bad debt on your P&L will have a negative impact. So writing the debt off, can be a quick and immediate fix both the P&L and efficiency in the hospital.

We've already established that veterinary hospitals do not use the matching method, but we should still understand it. To illustrate the matching principle in the veterinary supply chain, let's consider a scenario where a veterinary hospital purchases medication from a supplier on credit. The supplier will run a credit check on the business to establish how much credit they want to extend in a month. Then the hospital can purchase all the items, medication and supplies it needs in a month. The supplier then sends the bill at the end of the month to get paid. Ideally, the hospital pays the bill and the cycle repeats. However, because there is no guarantee the supplier needs to plan appropriately. This involves the matching principle. Le's say the supplier has $70,000 in accounts receivable less than 30 days outstanding and $30,000 of accounts receivable that is more than 30 days outstanding. Based on the supplier's history, 1% of all accounts receivable less than 30 days old will not be collectible and 4% of all accounts receivable more than 30 days old will not be collected. To calculate the allowance for bad debt ($70,000 x 1%) + ($30,000 x 4%) = $1900.

If you are looking for more resources on P&L and financial intelligence, here are my three favorite books:

• Financial Intelligence, Revised Edition: A Manager's Guide to Knowing What the Numbers Really Mean by Karen Berman and Joe Knight

• How to Read A Profit And Loss Statement, 2/e by Dr. Ramachandran

• Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! by Robert Kiyosaki

These books cover a wide range of financial topics, from understanding financial statements to personal finance and investing. They should provide you with a solid foundation for improving your financial intelligence and making informed decisions.

Bad debt is a problem faced by many businesses, including veterinary hospitals. While veterinary hospitals are not designed to offer credit, there are times when clients are unable to pay their bills. To eliminate bad debt, veterinary hospitals typically utilize the write off method. While the matching principle can be challenging to apply in this context, it is important for veterinary hospitals to keep track of their revenue streams and expenses to ensure that they are running a profitable business.