Understanding a practice’s financial health is an important element in the due diligence involved in a practice transition. If you’re reviewing a practice to purchase, having a financial analysis or valuation completed before selling your practice, or even if you’re simply looking to make improvements in your business, the financial health is a core piece to understanding the business and driving decisions. 

Two key metrics that help determine a practice’s performance include production and collections. While these are common accounting terms in the dental industry, people often misunderstand them, use them interchangeably or consider one to have more significance over the other. 

In truth, both metrics often work cohesively and allow you to look at the full picture. Understanding the difference between production and collections and how they function together can support the foundation for truly knowing your practice.  

Production and Collections Defined

Production is a measure of the procedures and services performed. It represents the total amount billed or potential money generated from those services.  

There are two ways to capture production in a practice’s system: gross production and adjusted production. Gross production represents the potential money generated when the service or treatment is captured at the usual and customary rates (UCR), so before any write-offs, discounts or adjustments. Adjusted production represents the potential money after write-offs, discounts or adjustments.   

Collections represent the actual money that comes in the door from both patient payments and insurance payments. Because of many variables, the practice does not always “collect” the entirety of what is “produced” (more on that below).  

Simply put, the more you produce, the more you can collect, and the more you can potentially make. 

A Healthy Collections Percentage

In a perfect world, you would collect 100% of what you produce, but it doesn’t typically pan out that way. To compare the money collected to the amount billed for services, the collections percentage is calculated using this formula: 

Total Collections / Total Production x 100 = Collections Percentage 

The collections percentage can indicate how effectively a practice is collecting payments, which is a key indicator of overall performance. Note that it’s important to understand how a practice captures production, whether it’s captured as gross production or adjusted production in its system. To see the true health of the practice, NDP prefers to look at the gross production.  

On average, NDP recommends practices target a collections percentage of at least 95-98%. If the percentage is lower, it can warrant closer review and potentially process improvements.  

The Variables That Affect Your Collections Percentage

There are a handful of reasons that can contribute to a gap between production and collections. Things can add up quickly, so keeping an eye on these factors will help keep your collections percentage, and thus your overall profitability, high.  

Insurance Write-Offs: An insurance write-off represents the amount you will not collect for the work you and your team produced. When a patient is in-network with your practice, the insurance company can dictate how much they cover for each treatment and procedure, and you are essentially agreeing to a discounted price. 

This is likely to impact your collection percentage more if you are capturing gross production in your system versus adjusted production. If your UCR for a crown is $1,200, but your patient is a PPO patient and your contracted fee for that particular crown is $850, then you cannot charge the patient more than $850 for that procedure code. If the fees in your system are your UCR fees, then the “production” booked for this procedure would be $1,200, and you would need to write off the difference of $350.