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  • 1. Planning and Budgeting in Healthcare 1Planning and Budgeting in Healthcare By: Tomeka Lewis Strayer University Healthcare Finance May 13, 2012
  • 2. Planning and Budgeting in Healthcare 2 Planning and Budgeting in Healthcare The purpose of this document is to discuss planning and budgeting in healthcare. Thefocal point will be about Hatcher Orthodontics an area dental clinic where planning, budgetingand financial management has helped this organization survives in a competitive market. Theturning point will discuss organizational objectives such as cost effectiveness for both theconsumer and the company. Hatcher Orthodontics will show a demonstration sample of theirassets and liabilities for a month and then a five year short term budget. This will exemplifyhow financial management and good teamwork helps them continue to provide a world classstate of the art technology in a warm family–oriented environment. Finally, this paper will giveexamples of formulas that can be used to track spending and profit for Hatcher Orthodontics andaddress what is needed in the step by step planning, and financial management process. A timevalue analysis, pertinent financial ratios, breakeven analysis and not present value will beassessed to assist with choosing an investment that would be profitable for Hatcher Orthodontics.The conclusion will reiterate the previously stated. Planning and budgeting requires teamwork. It is a familiar duty of healthcare managers.Preparing a budget and planning ahead helps managers prepare for the future and setexpectations. A budget allows access to financial performance and ensures that operations arecarried out as expected. Planning is creating a guide that prepares healthcare organizationsahead of time. However, budgeting consist of accounting functions which creates a bridgebetween planning and controlling the functions of the organization. A large amount of time isspent on planning activities for budgeting which is usually for the immediate future. However,
  • 3. Planning and Budgeting in Healthcare 3for long term financial budgets the best control mechanism is to ensure that organizational plansand goals are in current performance and is consistent with the set expectations. There are twotypes of budgets that managers at Hatcher Orthodontics will focus on; flexible budgets andvariance analysis. Both of these types of budgets will assist in controlling current operations forthe organization. These accounting tools will assist the accounting staff with preparing fororganizational financial goals that are long-term, or create a budget which is to be used in theimmediate future (Gapenski, 2012, pp. 253). Budgeting and planning at Hatcher Orthodontics would need to take into consideration the overall goal of the clinic. A strategic plan would be the first necessary step prior to selecting pricing and servicewhich involves creating a values statement which is a list of core values and beliefs which in most instances are four to six core priorities that are the guiding light to the organizations plan. An example of the values statement would be; 1. Treat everyone with kindness and respect 2. Believe that there is hope for all relationships 3. To show empathy and sincerity in every level of care 4. Do always do the right thing in all situations 5. To maintain a high level of patience and perseverance with all patients 6. To provide a high quality of excellent healthcare at all times (Gapenski, 2012, p. 254). The next part of the planning process would be to create a mission statement that is consistent with the values statement. This statement provide a reason for the existence of Hatcher Orthodontics and that consist of their desire to provide the highest level of orthodontic treatment using state of the art diagnostic equipment at the lowest possible cost.
  • 4. Planning and Budgeting in Healthcare 4 This statement will help the organization employees receive the maximum from their benefits and their stockholders as well (Gapenski, p. 254). The third step to be considered is the vision statement which works along with the mission statement. This is just one sentence that points out how the healthcare organization visions themselves in the future. The goal of the vision statement is to motivate managers, employees, medical staff to work as a team to promote a higher quality of care so that patients will return and recommend their services to others in the community. These actions will ensure that the business will be viewed as the regional leader for providing state of the art orthodontic services that is compassionate in a healthy environment that promotes humanistic values. Using the values, mission and visions statement gives managers the tools needed to build a framework that has specific goals and accomplishments that will meet the expectations of the healthcare facility. At Hatcher Orthodontics, they have a solid history combined of 125 year experience.They are talented in creating healthy and happy smiles for their patients. Their specialty is tocreate a comfortable environment that is friendly and family-like in many ways (HatcherOrthodontics, 2012,p.3) This facility has a management, administrative, and clinical staff that possess good workethic and promotes teamwork. They work together to ensure that all organizational goals areattained in a qualitative nature. They work hard at staying focused at achieving theirorganizational goals by ensuring that their mission statement is achieved by providing the bestpossible state of the art care and technology in a caring environment while giving all patients asmile (Hatcher Orthodontics, 2012 p.2). Their organizational goals include providing patientswith patient satisfaction. They have established policies and corporate goals which are in place
  • 5. Planning and Budgeting in Healthcare 5in efforts of meeting the demands of the industry. However, these goals can change at any giventime and can be challenging but not impossible to attain (Gapenski, 2012). Hatcher Orthodontics, has established a written policy which lists the hours of operationalong with cancellations and any attached fees if proper notice of the 2nd cancellation is notreported properly. In effort of keeping the services at reasonable pricing, they make severalpayment options available to patients. These include in-house financing, MasterCard, Visa, cashpayments and multiple patient discounts. Prior to services rendered, each patient or the parentsits down with the finance manager to discuss how the services will be paid for. If perhaps atany time the family cannot continue the payment arrangements, there is no problem stoppingthem and restarting at a later time. Hatcher Orthodontic service gives discount services to allpersons whether they have insurance or not. Most insurance are welcome for parents and theirchildren. Everyone working together to achieve the corporate goals which is why teamwork isso vital to this dental facility. Organizational components have been set and consist of the teamof dentists, administrative health systems management, OSHA staff, financial management,appointment setters and clinical staff. With these individualized services, the quality and patientsatisfaction, medical staff relations, human resource management, financial performance andhealth systems management should be met without any delays. Organizational objectives shouldbe applied technology based on the needs of patient and to meet the competitive market in thelocal business area. According to Gapenski (2012), as part of maintaining a consistent financial condition, theobjectives for meeting monetary goals must have a starting point which is quantitative in natureby specifying and targeting a specific market share that will bring a return of equity (ROE) (p.
  • 6. Planning and Budgeting in Healthcare 6256). A list of goals permits the dental clinic to maintain a high performance level within ahighly competitive market area. Hatcher Orthodontics should strive to maintain or exceed theircurrent 10 percent operating margin, or increase the clinics debt ratio to 35 to 45 percent. Thistask cannot be achieved by taking on new projects in this business because it will lower the profitmargin instead (p.256). Objectives of this sort allow managers the opportunity to be morespecific in choosing their targets. However, the targets must support the goals of the businessand bring revenue. For this reason objectives and goals should be chosen wisely and carefully sothat although they may be challenging, they can be achieved in a short time. Operational planning is the next step in the planning process which should be the map tothe future of the business. The operation plan is a detailed guide that consists of a map of howthe objectives and goals of the business will be attained. Services and pricing are part keyelements of the organizations strategic plan. This operations plan will include a financial planand budget that can be short term which is one to five years, or long term which is up to tenyears. This plan allows the business to map out how they expect to progress within a specifictime frame. Most businesses use a five year time horizon. Financial planning at this point takesplace at the departmental level with technical assistance from all finance staff, planning andmarketing which supports the corporate plan. At Hatchers Orthodontics the five year financial plan focal point would look at thefinancial condition, investments and financing. Reviewing these components would givemanagers and staff and idea or starting point as to how to proceed until the plan is completed.Next would be the capital budget analysis outline which would consist of equipment purchases,
  • 7. Planning and Budgeting in Healthcare 7lands and buildings are all part of the forecasted finance statements. The clinics future financingplan is based on how to achieve the funding for the future of the organization.Working Capital Management = asset – liabilitiesThis plan supports the overall day to day short term financial operations. For example; ifHatcher has a working capital management of PaymentsPatients Seen Credit Cards Cash Insurance Billing In House Financing DailyTotal Capital 30 $8,000 $3,000 $7,000 $12,000 $30,000 1. Daily Assets 2. Daily Liabilities 3. Financial statements 4. Forecasted expenses 5. External expenditures a.Ongoing capital management b. Working policy c. Petty cash budget 6. Cash market and securities management 7. Inventory control 8. Revenue management 9. Short term financing 10. Credit card payments 11. Monthly Events budget a. Employee Incentives b. Patient Rewards Budgets c. Staff Parties 12. Monthly Supplies and equipment 13. Budgeting and Control a. Revenue budget b. Expense budget c. Operations budget
  • 8. Planning and Budgeting in Healthcare 8 14. Administration and Human Resource Management 15. Facilities Management (OSHA) Hatcher Orthodontics Monthly Expenses FormMortgage $10000Salaries/wages $_150000Payroll expenses $_3000Equipment leases (copiers, fax machines, telephone system, computer) $__1500__Depreciation $__1000________Supplies $ 25000Inventory $_2100Advertising $__300____Utilities $_1000_____Licenses/permits $_400Insurance $__3000_Accountants fees $__5000_Attorneys fees $_1500_Dues/subscriptions/fees $_1100Repairs/maintenance $_1000Taxes $___2000Loan payments $__10000Other expenses $__2000______ (Start up Expenses, 2012, p. 1)Monthly Liability Total = $ 219,900
  • 9. Planning and Budgeting in Healthcare 9Section two of the financial process involves taking the working capital management which arethe profits for daily costs and multiply the total daily proft times (x) the number of working dayswhich are twenty.$30,000 daily profit X 20 days = $600,000 is the Monthly Working Capital of AssetsMonthly Expenses Liability = $219,900Revenue for the month is the Assets minus the liabilitiesA-L=R$600,000 - $219,900 = $ 380,100 Annual Profit = R X 12 = $4,561,200 The general idea is to make sure that this short term plan provides operating benchmarks forall levels of management that also includes the financial goals of the business. Frequentcomparisons many be necessary. This budget provides an overview of detailed plans that wereexpressed in dollar terms. It specifies how resources will be obtained and used during the fiveyear period. This budget is flexible and can be changed or amended at any given time for thesake of meeting the needs of the patient and in effort of promoting a higher quality of care thatmeet the competitive market of orthodontic clinics in the local area. In effort to attaining thefinancial goals proposed each year, a budget must be in place for the sake of doing what needs tobe done to improve the performance of the organization and for improvement of finances. There are many types of budgets that can be used in healthcare facilities. Conventionalbudgets allow the organization to begin the starting point for the new budget with the old budget.Each line on the old budget is reviewed and necessary adjustments made. The other budget is azero based budget which begins with a clean slate and everything must be justified andaccounted for (Gapenski, 2012, p. 261).
  • 10. Planning and Budgeting in Healthcare 10 A timed value analysis is a component used in healthcare systems to help management seeka good way to invest a portion of their annual profit into a bank where it will be profitable. Forexample if Hatcher Orthodontics took fifty percent of their annual profit which would beapproximately $2, 256,000 and placed it into a retirement account that offered interest at a sevenpercent rate, then over a period of five years will rollover nearly five times the amount placed inthe investment account. Time value analysis allows Hatcher Orthodontics make good choices inmanaging their profit by investing their dollars into an account that will make profit over time.In the timed valued formula below is an example of how profitable it is to invest money to makemore money which is for the good of the business. This Modified return cash annuity will paythe beneficiary the amount equal to the value of the account. The initial investment would be$2,256,000 (Advisor World, 2009).Time valued formula:P = A (1+i)^nP = The amount of money by end of n years and i interest rateA = Initial investmenti = interest rates. If it is 7% put it as 0.07n = number of years the investment take place which is 5. P = $2,256,000 (1+0.07) 5$12069600 = $2,256,000 (1+0.07) 5 (Yahoo, 2012, p. 1)Investing is a vital part of the dental business. Every organization wants to make a good sounddecision as to how to make their money gain profit. A good investment for HatcherOrthodontics would be for retirement in the form of an annuity. Hatcher Orthodontics is
  • 11. Planning and Budgeting in Healthcare 11privately owned and operated. They have to survive once the business is not there anymore. Iwould suggest they place their money in an Annuity account that offers a 10 percent interest rate.Using the net present value formula below can be used to see how the value of the dollar is todayversus years to come. According to (Wang, 2005), correctly measuring the value of aninvestment that produces a stream of benefits is net present value. “The net present value of aninvestment project is then defined as the sum over all time periods of discounted net benefits(Wang, 2005 p.1).” NBt is net benefits in period t, and r is the discount rate. The lowered rate ris the prevailing rate that allows money today to be traded for future dollars. It is the price listedfor dollars traded in different time periods between time periods, which is the "opportunity costfor funds available for either investment or consumption. Formula (1) shows that costs andbenefits in all periods are first translated into net present value terms, using the discount rate r,and then the separate net benefit terms are summed to give the value of the project (Wang2005,p.1)” Not present value formula (NPV) calculation already accounts for the best choice ininvesting funds by discounting the basic benefits at discount rate r. Thus, any project with anNPV>0, by definition, is of greater economic value than other existing investment opportunities.if NPV = $x is greater than zero, then the project is worth $x more than other availableinvestment rates. The key point here is to consider a project with an NPV>0 is better than otheralternative economic investment opportunities and is deemed to be worth the investment.Net Present Value Formula
  • 12. Planning and Budgeting in Healthcare 12 Pertinent financial ratiosCurrent Ratio = $600,000 $219,900 Net Working Capital = Current Assets - Current Liabilities $600,000 - $219,900 = $380,100 _______________________________________________________________________
  • 13. Planning and Budgeting in Healthcare 13 ROA = Profit Margin X Assets Turnover Ratio 380,100 $380,100 $600,000 monthly ROA = ------------------------ = -------------- X ------------------------ $600,000 $600,000 $380,100Profit Margin = Net Income / SalesAssets Turnover Ratio = Sales / Averages Total Assets (CPA Class. 2012) Additionally, prior to making a sound decision about investments a breakeven analysis need to take place happens when the cost of the organization is equal to the profit. When the finance manager can accurately forecast the cost and expenses then it’s time to do the simple math. That means that the total expenses and cost must be deducted from the profit. If the company finds that it has broken even and suffered no loss or gain, then they need to take a closer look at how to improve their profit. This calculation is critical to Hatcher Orthodontics when determining margins. There is no room for unexpected cost that are unforeseen, nor is there room for investments (Richards, 2012). Creating a pricing chart is a critical step in the breakeven analysis. The unit price is what is being charged for each service. For example; Hatcher Orthodontics gives the first retainer free when braces are removed. However, if the top or bottom need to be replaced the unit price is within the range of $365.00 and above for either the top or bottom. So when considering investing, this type of breakdown is needed before a decision to invest can be considered (Hatcher Orthodontics, 2012). The risk/return would have to be a tradeoff which would help the dentist sleep at night. Some people take financial risks that are equivalent to jumping off a cliff and are not as worried.
  • 14. Planning and Budgeting in Healthcare 14However others are afraid of taking financial risks. The main focus should be deciding theamount of risk while remaining in a comfort zone financially. In the investing world the return isalways different than the initial investment. It could be more than expected or less. This part ismeasured in statistics referred to as the standard deviation. The risk/trade off creates balancebetween the lowest and highest possible return. The higher the standard deviation is on the scale,the higher the chance of gaining for the investment. The best thing for Hatcher Orthodontics isto only invest an amount that if they suffered loss from the investment, they can still survive andbe in a comfortable financial zone. That way financial risk would not cause the clinic financialdistress regardless of the return. In closing, Hatcher Orthodontics is a dental clinics who specializes in creating healthysmiles. Their organizational goals, objective, mission, vision statements and commitment is toservicing the community in its local area. The corporations strategic plan is clearly identified ineffort of meeting the demands of the dental industry. The pricing is reasonable and competitivewith other orthodontic practices in the areas because give discounts and have various paymentarrangements available to all families. The dentists, managerial staff, financial and administrativestaff along with the clinical staff possess a combined 125 years’ experience which is clear thatthe business is profitable and in a comfort zone financially. Their commitment to their patientsand the incentives they provide to both the staff and their clients shows that they share theirprofit and maintain a positive relationship with their consumers. They even have rewards setaside to give to patients who follow the protocol of brushing and keeping their smiles bright andhealthy. Planning and budgeting are vitals components of sound financial management andpromotes improvement as required when running a business. The managerial staff,administrative staff, OSHA/Facilities, Cleaning/Supply and Clinical Staff at Hatcher
  • 15. Planning and Budgeting in Healthcare 15Orthodontics work as a team to overcome challenges in effort of attaining their financial goalsand to continue to provide the state of the art services and technology in a friendly familyoriented environment.
  • 16. Planning and Budgeting in Healthcare 16 ReferencesAdvisor World (2009). Finding the Best Investments for Your Financial Portfolio. Retrieved on May 12, 2012 from www.advisorworld.com.CPA Class (2012). Retrieved on May 12, 2012 from http://www.cpaclass.com/fsa/ratio-01a.htmGapenski, L.C. (2012). Healthcare Finance: an introduction to accounting and financial management, 5th Edition. Chicago, Illinois: Health Administration Press.Hatcher Orthodontics (2012). Retrieved on May 11, 2012 from www.hatcherorthodontics.org.Richard, Daniel (2012). How to do a Breakeven Analysis. Retrieved on May 12, 2012 from http://entrepreneurs.about.com/od/businessplan/a/breakeven.htmWang, A. (2005) Key Concepts in Evaluating Outcomes of ATP Funding of Medical TechnologiesJournal of Technology Transfer, VOL. 23 (2): 61-65. Retrieved May 12, 2012 From http://www.atp.nist.gov/eao/jtt/wang.htm