Presentation on theme: "North Carolina Community Health Center Association Financial Management & Operations Workshop Financial Strategic Planning for Community Health Centers."— Presentation transcript:
North Carolina Community Health Center Association Financial Management & Operations Workshop Financial Strategic Planning for Community Health Centers March 3, 2011
Today’s Agenda Why focus on strategic planning and health center sustainability issues? Sustainability scenarios – a look at the possibilities Establishing financial health indicators for your organization – financial targets and goals Development of a financial sustainability model - forecasting financial outcomes Definition and purpose of a financial forecast model Understanding key drivers of financial outcomes Final thoughts
Why Focus on Strategic Planning and Sustainability Issues?
Health Center Financial Sustainability – Common Myths Our passion is our mission – the money does not matter (there will always be a third party sympathetic to our cause and willing to provide deficit funding) A not-for-profit organization can’t make money We cannot accumulate cash (financial reserves) without negative consequences If we can make it to the end of the current (start of the next) grant period, everything will be fine Bigger is always better – a top line vs. bottom line focus
Financial Sustainability Defined Most concise thought – “the capacity for an organization to endure financially” Provide ongoing services in a financially stable manner To meet the objectives of this definition, health centers should develop a strategic financial plan that measures the financial outcomes of subsequent decisions
Financial Sustainability Plan Considerations for development of a financial sustainability plan One size does not fit all – the plan should reflect an organization’s unique circumstances Organization priorities – does this document dovetail with the health center’s strategic planning process? Is the plan based on realistic but conservative assumptions? Does the plan provide for most likely and worst case scenarios? What information do potential funding partners want to receive?
Financial Health Reminders Financial health should be a priority BPHC PIN includes a focus on financial systems Community health centers must be proactive (versus reactive) on financial management issues The BPHC expects the Board of Directors & health center management teams to make prudent & sound business decisions in compliance with applicable rules & regulations
Finance - Under the Microscope Increasing federal investment under the American Recovery & Reinvestment Act of 2009 – the federal stimulus program Increased scrutiny of health center financial results by the federal granting agency, lenders & donors Expect reporting requirements to be expanded & closely monitored OIG audits are now a reality
Finance – Under the Microscope Increased tightening of state budgets resulting in reduced services and/or payments Be aware of changes in the payer mix that may have a detrimental impact on the financial results of the health center Strategic financial planning is necessary to identify anticipated financial impact of program changes Operational results Cash flow implications
Existing health centers Ongoing operations Addition of new sites Established with ARRA new access point federal grant funding Other new access points receiving federal grant funding New health centers Established with ARRA new access point federal grant funding (temporary or permanent funding?) Other new access points receiving federal grant funding All health centers – establishment of new programs and/or services All health centers – capital investment considerations
Existing Health Center – Ongoing Operations Primary issue of concern – the health center must focus on operational profitability, maintaining a positive operating cash flow, and strengthening the balance sheet Business decisions should be made by management and the Board of Directors based on an educated estimate of the implications on operational profitability and cash flows
Existing Health Center – New Sites Primary issue of concern – the health center must understand the probability of the new site becoming financially self-sustaining What period of time will this require? What happens if the primary source of funding is discontinued – does the health center have a financially sound exit strategy? Sometimes difficult decisions must be made – new sites should not erode the overall financial health of the organization over an extended period of time Management and the Board of Directors must determine the time frame that will be reserved for evaluation of the ongoing sustainability of new locations
All Health Centers – New Programs/Services Primary issue of concern – the health center must focus on the financial viability of new programs/services on an ongoing basis Financial analysis should be performed to proactively estimate the impact of new programs/services on operational profitability and cash flows of the health center What exit strategy exists if new program/service funding streams change due to state and other funding agency budgetary decisions? There is a need to fully understand the consequences of accepting new grants for programs/services Does the cost of implementation and ongoing compliance outweigh the benefits to be gained?
All Health Centers – Capital Investment Considerations Significant issue given the level of new federal investment for capital purposes available through ARRA Primary issue of concern – the health center must focus on the financial implications of new capital investment Outside financing needs – principal payments on debt issues and related interest expense Reimbursement considerations of increased capital- related costs (depreciation, lease expense, interest expense, amortization of financing costs, etc.) Caution – a careful financial analysis must be performed in advance of application for (and receipt of) capital investment funds Should the health center perform a debt capacity study?
Establishing Financial Health Indicators - Financial Targets and Goals
Establishing Financial Goals Financial goals should be established for: Operational profitability Balance sheet health (ongoing growth of health center net assets position) Cash flow targets Development of key financial indicators can be at an organization-wide level and/or drilled down to much more detailed levels (site specific, program specific, etc.) What are the key financial indicators that should be monitored?
Key Financial Indicators Current ratio Measure of the health center’s ability to liquidate current obligations (current assets divided by current liabilities) 2:1 is a healthy current ratio Anything less than 1:1 could indicate serious issues that need to be addressed
Key Financial Indicators Net days revenue in net accounts receivable Important to calculate periodically as growth of accounts receivable can hide poor operating performance 30 to 45 days of net revenue in net accounts receivable is reasonable Anything higher could indicate any number of potential problems in the revenue/cash receipts cycle
Key Financial Indicators Days cash on hand - calculated as follows: Total operating expenses minus non-cash expenses (depreciation, etc.) divided by 365 = average day’s expenses Total cash plus unrestricted investments divided by average day’s expenses = days of cash on hand days of cash on hand a good target
Key Financial Indicators Days in accounts payable - calculated as follows Total operating expenses minus non-cash expenses (depreciation, etc.) and wage- related expenses (salaries, benefits, etc.) divided by 365 = average day expenses Accounts payable divided by average day expenses = days in accounts payable Target should be < 30 days
Key Financial Indicators Debt to equity ratio - calculated as follows Long-term debt divided by long-term debt plus unrestricted net assets = debt to equity ratio Generally target less than.40
Key Financial Indicators Operating income to total revenue ratio Calculated by dividing total revenue by operating income Target should be 2% to 4% to generate necessary operating cash flow to use as follows: Replacement of fixed assets Payment of debt obligations Funding of cash reserves
Monitoring Key Financial Indicators Once goals are established for key financial indicators, ongoing monitoring must occur Monthly financial statement review Development of dashboards Periodically with reconsideration of financial sustainability plan scenarios (best case, most likely, and worst case)
Developing A Financial Forecast Model
What is Financial Forecasting? A forecast of the expected financial position and the results of operations and cash flows based on management’s expected course of action
Importance of Forecasting To achieve ongoing sustainability, it is important to be able to see the train coming down the tracks and have the ability to move rather than being ran over and have no idea what hit you Critical development tool for all health centers regardless of size or life cycle To perform due diligence on the financial feasibility of projects under consideration
Can be a very useful tool in making operational decisions Used in the budgeting process Used in long-term strategic financial planning (development and ongoing maintenance of the financial sustainability plan) Importance of Forecasting
Purposes Financing Traditional financing Grant applications Donor requests Large capital expenditures/projects Replacement facility New/additional site Major equipment purchase Software Medical/dental equipment
Strategic financial planning (development of the financial sustainability plan) New site New program or service New provider(s) Potential change in revenues Medicare Medicaid Payer mix Federal and state grants Purposes
Financial Model - Key Elements Accuracy – the model is only as good as the data you put into it Objectivity – do not skew the data to arrive at a predetermined answer Appropriate level of detail – there should be enough detail to accurately forecast, but not so many details that the model becomes confusing and cumbersome
Financial Model - Key Elements Flexibility – model should allow for updates based on changes in assumptions Presentation – end product should reflect the intended end user
Volume Encounters, prescriptions, etc. Site Service Type –Provider »Payer mix Ability to adjust volume growth Assessment of demand?
Third-Party Payer Reimbursement Medicare FQHC cost-based reimbursement considerations Projected reimbursement rates Additional costs Type of costs Additional encounters/charges Pro-forma cost report can be a useful tool
Third-Party Payer Reimbursement Medicaid Prospective Payment System (PPS) considerations Do you know the details of your state’s plan as included in the Medicaid state plan amendment (SPA)? PPS rate setting alternatives for new sites Scope change opportunities for PPS rate reconsideration
Other Revenue Grants Federal, state and local sources How stable are these sources of health center funding and how dependent is the health center on each source? Warrants a sensitivity analysis for sources that are of a material nature to health center financial goals and objectives Community benefit grant – certain situations
Other Revenue Contracts Donations/contributions Income on investments
Cash Flow Assumptions Working capital assumptions Days in Accounts receivable Prepaid expenses Supplies inventory Accounts payable Accrued payroll items Due to/from third party payers
Cash Flow Assumptions Sources and uses of cash other than from operational activities Receipt of capital grant funds Financing transactions Lines of credit Issuance of long-term debt Acquisition of property, plant, and equipment assets Repayment of principal on long-term debt obligations Funding of cash reserves Other
Remember – the “tone at the top” should reflect a commitment to sound business principles & ethics Underlying principle to consider – to achieve ongoing financial health and sustain the mission of the health center, operational profitability is a “must”
910 E. St. Louis St. Springfield, MO Office: Fax: Jeffrey Allen, CPA Partner