Basic Business Accounting and the Research Site - RxTi

You?ve negotiated your study budget and are feeling good about the revenue your site will earn.? But the health of your business relies on more than just potential revenue.? Below are two simple accounting concepts that will help you measure your financial performance and strengthen your cash flow.

Cash v. Accrual Accounting

Cash basis and accrual basis are two principal ways that businesses keep track of income and expenses.? The cash method is used for businesses that do not count income (like completing a trial visit) until they actually receive it and expenses are not counted until they are actually paid.? Under the accrual method, the business counts the income when a sale or service occurs and counts the expense when they receive a good or service ? and not when they literally receive or pay out the cash for those items.? An illustration we can all relate to is when a coordinator completes a trial visit, for the sake of example, on January 1.? Using accrual, the business would book the income on January 1 regardless of the payment terms stated in the contract.? Using cash, the business would record the income when the check arrived (statistically 120 days later).

Because of the payment terms in the majority of clinical trial agreements there will be times during the year, using the accrual method, that your books would show a lot of income but your bank account would not.

Now, when is that payment due?

Accounts Receivable: Aging

An A/R aging report reflects amounts due from customers and how long they have been outstanding, commonly broken down into Current, 1-30 Days Past Due, 31-60 Days Past Due, Over 60, and for the bank: 60-90 Days Past Due.? The bank will view anything beyond 90 days as uncollectible and will not count amounts due after that time as assets when determining your line of credit.

When is money ?due? on a clinical trial contract with a quarterly payment schedule?? Using again the example of a coordinator completing a visit on Jan 1, the payment is due during the month of April.? That?s right ? money you earned on Jan 1 isn?t even considered ?late? until May 1.? In 2010, 51% of all clinical trial contracts had quarterly payment terms (source: 2011 Site Solutions Summit Survey of 87 sites) with a withholding percentage in the range of 6-10% that is not paid until the end of the study.

Also in the same survey, we asked what percentage of A/R was 90+ days old.? 44% of sites reported that as much as 20% of their A/R was greater than 90 days old and the remaining 56% of sites reporting that more than 20% of their A/R was 90+ days, with a startling 14% sites reporting that over 60% of their A/R was 90+ days old.?

It should also be noted that there are no penalties for late payments in clinical trial contracts. Collecting outstanding A/R needs to be more of a priority for sites.

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Michael Jay

Vice President, RxTi

Want to learn more about how these concepts affect your business?? Sign up for RxTi?s March 13 webinar, ?Tracking Your Receivables, Staying On Top Of Late-Paying Clients And Establishing And Communicating Collection Practices? (http://rxti.net/webinars/)

Source: http://rxti.net/blog/2012/03/01/basic-business-accounting-and-the-research-site/

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