Describe the importance of credit control for Meridian Health and what consequences it can face if it persists with the same system of managing debt through collection agencies.
"Managing of incoming and out going payments is known as credit control" A credit control policy always ensures that customers and suppliers are paid on time and cash flow remains vibrant. The credit control system of an organisation depends on two policies Credit Policy and Collection Policy
The bad debt of Meridian Health was$25 billion a year for uncompensated care charges. As per the case study the bad debt has increased because of high number of uninsured patients and rising healthcare costs. Operational inefficiencies, lack of communication and not keeping a track of collection agencies plus no control over debt policy adherence were the major drawbacks of the existing credit control system.
"Collection policy deals with the matters of collecting debt from the customers ensuring to reduce further any credit risk in payments". Meridian Health had merged with 10 collection agency to reduce the bad debt but due to lack of a proper management system the collection agencies were not monitored. Some of the agencies sent there performance reports and some of them didn't. So it was difficult to evaluate which agency performed well. Lack of staff and no automated system led to invoices not being verified and once an agency was overpaid by $97,000 due to this. Later the managers realised that it was due to faulty accounting procedure. After this Meridian Health thought of installing a new debt management system which would enable them to monitor the collection agencies and track the records. One year after implementation, write-offs to bad debt decreased by $8 million, and bad debt as a percentage of net patient service revenue decreased by 1 percent. After two years, total collection fees decreased from $3 million to less than $2 million. The ongoing revenue stream has improved more than $1 million in secondary recoveries per year since implementation. Overall, these results are attributable to the new debt management system combined with improvements in Meridian's revenue cycle.
Consequences that Meridian Health would have faced because of the old managing systems are as follows
Increase in credit risk
Increase in bad debt expenditures
Late payments by debtors
Tied up capital in debtors due to ineffective debt recovery
Increase in holding cost
Tied up capital in stocks due to over production
Ineffective credit worthiness resulting due to excess credit limit granted
Decrease in profitability
Inefficient sales strategy due to inability to distinguish good and bad customers
Restricting the borrowing ability as banks adopt more cautious approach towards the company
Future growth plan affected due to unavailability of sufficient funding
Late payments to the creditors affecting credit history of the firm
Bankruptcy
Describe other possible solutions of credit management beside the one implemented by Meridian Health.
Credit Management is a system that supports flow of information from one department to the other to make a quick and efficient credit decisions.
Credit Insurance is alternate credit management system that can be implemented by Meridian Health.
Benefits of Credit Insurance are as follows:
Protects against commercial risk such as customers bad debts and overdue accounts.
It enhances over all credit management process.
It provides early warnings that the customer is in financial difficulty
It provides assistance with targeting sales target
It provides access to high quality credit opinions from external sources.
The implementation of the management system would help Meridian Health to decide credibility of the patient. This would help to monitor the collection agencies and track the records of the patients.
To implement the current management system Meridian Health has included $236,000 on IT and $250,000 annually on operating expenses.
Meridian Health could have worked on their credit policy and collection policy to improve their bad debts. Before the implementation Meridian Health was lacking of staffs for which they were unable to verify the invoices properly and unable to track the records.
An important aspect of any credit management system is to have prepared credit terms and agreed them with customers before making a sale based on credit. Describe in what ways Meridian Health is dealing with this issues.
The main activities of the credit policy are Credit Selection, Credit Standards, Credit Terms.
Credit Selection: Credit selection depends upon four factors
Credit Limit should be given or not.
Five C's to determine the credibility of the applicant
Character, Capacity, Capital, Collateral, Conditions
Obtaining Credit Information
Analysing credit Information
Before giving any credit limit to the applicant the five C's plays a important role.
Character: Character stands for past records, past obligations
Capacity : Capacity for repaying the liability or the credit
Capital: Financial gearing ratio to analyse the financial health of the applicant by providing
Information on debts.
Collateral: Amount of assets available pledge as security under credit agreement.
Conditions: Current economic and business climate can have significant impact on the credit assessment.
Credit Information can be obtained Externally or Internally.
External resources mean bank reference, trade reference, credit ratings, credit reporting agencies, company registry checks.
Internal resources mean ratio analysis, working capital, Customer visit, in house credit ratings. In-house credit rating is checked from the past records of the patient, if the patient pays the bills before 15 days then he is a good customer.
Credit Standards: Credit standard shows the financial history of the patient like bad debts.
Credit Terms: It shows the period of the credit. If there is any discount if the patient pays all the dues before the due date.
The three main objectives of Meridian Health to deploy this are
Target accounts that are most likely to pay in order to prioritize resources.
Select accounts that should be kept in house rather than sent to a collection agency or attorney.
Optimize the assignment of accounts to agencies based on their performance in collecting on certain types of bad debt accounts.
