1. Overview Strategic Cost and Financial Management

2. Session Objectives Recognize how to control fixed and variable costs Understand the importance of financial statements Be familiar with financial ratios and what they mean

3. Insert a polling question: Do you track fixed costs? Do you track variable costs?

4. Four Steps to Cutting Cost 1). Know your fixed and variable costs 2). Identify benchmarks 3). Get buy-in from staff 4). Determine when to take action

5. Concepts Numbers Don’t Lie!!! Benchmarking Report Preparation –Frequency of report preparation –Review of practice management and financials should be the first agenda item in management meetings

6. Development of the Financial Reporting System Step 3: Tailor / customize the system to meet your needs. Step 2: Develop reports to meet the needs of the various users. Step 1: Identify the needs of the users of the information. Step 5: Continually re-evaluate system needs vs. output. Step 4: Develop standard processing list of reports, timing and distribution.

7. Financial Statement Interpretation Balance Sheet –Snapshot of the health center’s finances taken at a single point in time –Also known as a statement of financial position Income Statement –Measure of a health center’s financial performance over a specific accounting period –Also known as the statement of revenue and expenses

8. Tips on Analyzing the Balance Sheet Current Ratio Days in Accounts Receivable Days in Accounts Payable Days in working Capital

9. Tips on Analyzing the Balance Sheet Current Ratio = current assets divided by current liabilities. Want this ratio to be at least 1:1 and do not want to decrease over time. –$528,000/$600,500 = 0.88

10. Tips on Analyzing the Balance Sheet Days in Accounts Receivable = net patient accounts receivable, divided by average daily patient revenue ([Patient revenue, net of adjustments and bad debt, excluding managed care capitation] divided by # of days in period) Increase in ratio indicates potential billing problem and could hurt cash flow. ($272,000/(($900,000-$230,370)/365) = 148 days

11. Tips on Analyzing the Balance Sheet (cont.) Days in Accounts Payable = Trade accounts payable and accrued expenses divided by average daily trade expenses ([Total expenses less salaries and wages, donated services, bad debt and depreciation] divided by # of days in period) An increase indicates that the health center is paying vendors more slowly, indicating a cash flow problem. $225,500/(($2,004,500 - $1,216,475 - $47,500)/365) = 111 days

12. Tips on Analyzing the Balance Sheet (cont.) Days in Working Capital = Working capital (current assets minus current liabilities) divided by average daily operating expenses (Total expenses divided by # of days in period) This is a reserve ratio indicating the financial condition of the health center; goal is to be greater than 30 days. ($528,000-$600,500)/(($2,004,500 + $25,000)/365) = (13) days

13. Income Statement Analysis Trend and Relationships –Cost per encounter –Net revenue per encounter –Shift in payor mix –Change in reimbursement rates

14. Tips on Analyzing the Statement of Operations Trends and Relationships: Analyze changes in patient revenue as compared to changes in patient volume (i.e., visits), prior year vs. current year and current year vs. budget. Any unusual trends should be researched:  Change in reimbursement rates  Shifts in payor mix

15. What to Look for … Balance Sheet –Accounts payable –Excessive debt Income Statement –Proper presentation –Comparing revenue to payment posting –How to analyze overhead

16. What to Look for … (cont.) Sudden change in A/R tendencies Failing to reach benchmarks Sudden changes in production by Clinician( or other staff) Escalating overhead costs Inability to pay vendors in timely fashion Borrowing money

17. Things to Consider Flex- Time Volunteers/Interns New Revenue Streams Low Cost Incentives for Productivity

18. Questions? Gervean Williams Director of Finance and Operations NACHC National Association Community Health Care Centers