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Understanding Multi-Location Profitability

Understanding Multi-Location Profitability

Understanding Multi-Location Profitability

By Brian Ford

 

Steps to Take Now Heading Into 2021 (Article 2 of 4)

Continuing our series for healthcare services companies with net revenue under $40 million, we look at the importance of clear reporting around multi-location operations. Too often, companies do not have the infrastructure to understand profitability by location, but rather look at financial results in total. Overtime, this can lead to underperforming clinics or service offerings, resulting in a drag on overall profitability. By having the right resources in place, some benefits your business may realize include:

1. Visibility into the direct gross profit of the location and/or service line.

2. Appropriately capturing the costs of administrative staff, allowing management to see the true overhead burden. Too often, we see such costs reported where the employee physically works rather than assigned to their respective department.

3. Understanding the fixed costs of each location, allowing management to enter into more efficient office leases.

4. Analyzing whether clinics are truly underperforming, or does it lead to higher acuity visits at another location. It’s important to see how each location and/or service may be interdependent.

5. Aligning compensation agreements with the overall volume and efficiency of the operations.

In a short example, we look at a practice that started with one clinic location, and after several years of organic growth, had four locations in the same geographic market. The Owner did a great job launching new providers into the market, and expanding to different sub-markets within the larger metro area. However, much of the overhead and administrative functions remained in the original location. The management team attempted to allocate overhead, but it largely distorted the true burden for each clinic, thereby understating the stand-alone contribution margin for each location. With improved visibility into clinic operations and integrated financial reporting, the Owner made some great operational changes that improved profitability. Just to highlight some of the Owner’s accomplishment’s: (i) transitioned administrative employees (such as HR and payroll) out of expensive medical office space into an administrative office, while amending the medical office lease for much less square footage and (ii) created efficiencies in staffing by deploying underutilized staff to needs at other clinics.

Good strategic decisions often require the right financial reporting. If you know of a healthcare services company that could benefit from improved visibility into operations, please reach out.

Next Wednesday we’ll continue the series where I’ll highlight Key Metrics to Drive Increased Volume and Profitability. Whether it’s a single location or multi-clinic operations, having a set of consistent, key metrics provides clear data from which the team can manage.

Brian Ford is a FocusCFO Area President based in Nashville, TN.

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Eight Considerations for Improving Cash Flow for Healthcare Services

Eight Considerations for Improving Cash Flow for Healthcare Services

Eight Considerations for Improving Cash Flow

By Brian Ford
Steps to Take Now Heading Into 2021 (Article 1 of 4)

Over the next few weeks, I’ll be sharing a series of posts for healthcare services companies with net revenues under $40 million. In our first article, we highlight things to consider for improving cash flow heading into 2021. While many agree that demand for healthcare services is generally resistant to economic cycles, the patient’s ability to pay for those services is not as strong during turbulent times. As we all operate in an environment with continued uncertainty, visibility to, and improving cash flow are critical.

Here are some areas to consider:

1. How can your team improve patient responsibility collections?

2. Are you performing proactive analysis on proposed reimbursement cuts?

3. Do you have visibility into reimbursement by encounter?

4. Are you actively monitoring trends in reimbursement by insurance payor?

5. How do you track and mitigate payor denials and recoupments?

6. How can you improve the collection speed of Accounts Receivable?

7. What are the costs and time associated with launching a new provider?

8. How do you reduce inefficiencies caused from employee turnover?

This list is just a sample of ways our team guides healthcare services companies to better cash flow. While many of these issues are intuitive to healthcare operators, implementing strategies around these issues can be difficult. If any of these items sound like opportunities for your company to improve, and you want to learn more, please reach out.

In a short example, we look at how, once equipped with the right information, an Owner guided the management team to make some operational changes. Although volume and total cash receipts were up year-over-year, costs increased as well. After studying reimbursement trends, the management team realized the practice had declining collections and increasing labor burden per encounter. The team focused on improving the patient experience, and as a result, operational changes resulted in increased profitability. By being more proactive with the pre-arrival and check-in activities, the practice experienced: (i) improved patient collections, (ii) less denials, (iii) increased total collections per encounter, (iv) decreased time to collect Accounts Receivable, and (v) consistent processes at the front desk resulting in less turnover.

Coming up next in our series is Understanding Multi-Location Profitability. Look for our article next Wednesday when I discuss the importance of looking at profitability by location and/or service line and the operational efficiencies gained when armed with the right information 

Brian Ford is a FocusCFO Area President based in Nashville, TN.

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METRICS FOR EVALUATING NON-PROFIT PERFORMANCE

METRICS FOR EVALUATING NON-PROFIT PERFORMANCE

Metrics for Evaluating Non-Profit Performance

Non-profit organizations serve an important role in our society, providing services that for- profit organizations are either not interested in providing or can’t provide profitably. These non-profit organizations are extremely diverse, ranging from charitable socially-focused organizations to member- based groups.

Increasingly, non-profits are developing performance measurement systems that allow them to evaluate their progress toward achieving their missions. Metrics focused on how organizational activities are fulfilling the non-profit’s mission combined with financial performance indicators allow entities to understand how effectively they are serving their communities. The way these organizations execute their mission is very different from the execution of for-profit entities, but there are common approaches to performance measurement that can help organizations to manage their operations and to sustain their ability to serve. Here are three areas of focus for measuring non-profit execution.

Activity Effectiveness

Efficiently operating a non-profit is essential. Just as in any business, efficient operations generate additional cash flow for the organization, but in a non-profit it also demonstrates effectiveness to potential non-profit “investors” (donors, grantors and/or members) which can result in increased funding. Operational efficiency measurements vary for different types of organizations, but the metrics should measure progress toward the mission and the effectiveness of programs implemented. Activities to be measured should include a measure of productivity (mission-related outputs such as constituents served divided by inputs such as staff or dollars). Other appropriate measures of performance for organizations may include staff effectiveness, the hiring and retention of skilled staff, increased donations from current donors, or increased donor loyalty and retention.

To determine organizational financial efficiency, non-profits should analyze several standard performance categories including:

• Program Efficiency (program expenses divided by total operational expenses)
• Administrative Efficiency (administrative expenses divided by total operating expenses)
• Operational Sustainability (operating revenue as a percentage of costs – which measures the
net dollars the non-profit spends providing aid and support to the community)
• Fundraising Efficiency (fundraising expenses divided by total operating expenses)

The general consensus is that non-profits should spend at least 65% of their total expenses on program activities. Many believe that organizations spending less than a third of their budget on program expenses are ineffective. “Best of Class” organizations often spend 75% or more on program activities. Typically, efficient non-profits are expected to spend 15% or less on administrative expenses and 10% or less on fundraising expenses. These standards can change depending on the non-profit’s business segment. For instance, museums typically have above- average administration costs as compared to other types of charities because of the costs to maintain their facilities and collections.

Utilizing and Expanding Capacity

Effective non-profits are successful at mobilizing their resources. Organizations should measure their capacity utilization and their ability to grow capacity. Depending on their cause, that may require measuring efforts to increase donations from current donors, expand the current donor base, pursue funding from public sector agencies and government, increase market share, grow the number of volunteers, or recruit high-impact board members.

From a financial measurement perspective, non-profits should track their revenue growth compared to similar organizations, program expense growth compared to others in their industry segment, and their working capital to expense ratio. Comparing revenue and expense growth to others in a non- profit’s industry segment allows the performance metrics to be adjusted for economic trends. The working capital to expense ratio is important in determining how long (in years) a non-profit can sustain its level of spending using only its net unrestricted assets.

When growing capacity, it is important that the non-profit convince donors to fund infrastructure instead of only program services. Fundraising is critical to capacity expansion, and infrastructure is needed to support that capacity.

Fundraising Effectiveness (fundraising expenses divided by the total funds the organization receives as a result of that effort) is an important financial measure. “Best of Class” non-profits typically have fundraising expenses that are less than 35% of related funds raised. Although the expected ratio differs significantly by industry segment, generally non-profits should work to maintain a working capital to expense ratio greater than 1. Donor Dependency (operational surplus subtracted from donations, divided by donations) is another common financial capacity measure.

Long-term Objectives and Planning

As opposed to for-profit organizations where profitability and increasing owner value are the goals, non-profits are measured by their ability to fulfill their mission. Fulfilling the organization’s mission may require incurring financial deficits while providing more services to constituents in recessionary times. Surpluses may be managed in other economic situations. As a result, the long-term focus of a non-profit should be on sustainability.

Measuring progress toward the mission and the non-profit’s long-term objectives should drive high- level organizational focus. As a result, it is especially important that non-profits maintain strategic plans typically for three-year intervals. Cultivating a “sustainability” culture among board members, staff, donors and grantors is essential so that the organization can be a reliable service provider when recession comes. A common metric in measuring compliance with the non-profit’s strategic plan is to track the percentage of operating priorities that align with the organization’s mission.

From a financial perspective, three-year financial models and their related annual budgets are very important to long-term objectives and planning. Plans that include deficits are acceptable, but non- profits should not outspend their means. When an organization runs a combined deficit over time, its sustainability is suspect and it runs the risk of not fulfilling its mission. As a result, financial models should include combined surpluses over time and the establishment of cash and investment reserves for lean stretches. The working capital to total expense ratio discussed above is an important measure of long-term performance. Additionally, a common metric for successful non-profits is the ratio of the organization’s net unrestricted assets to annual expenses. It should be about three times the larger of the prior year’s expenses or next year’s budgeted expenses. It is important, however, to avoid accumulating assets beyond that point and tying up funds that could be used for current program activities.

Non-profits play an essential role in our society. In order to fulfill their vital assignment, it is important that they sustain their existence by performing at the appropriate level. Managing to key performance indicators like those discussed above will significantly help non-profits to achieve their mission.

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Kevin Winkle

Kevin Winkle

Welcome Kevin Winkle

Welcome to the FocusCFO Team!

Kevin Winkle is a Financial executive with over 30 years’ experience. Kevin is versed in financial management, new business development, and leading cross functional teams. He has a proven track record of helping businesses identify risks and opportunities and successfully executing plans to address them. Kevin is proficient in forecasting, P&L management budgeting, and cash flow management. He is a licensed CPA in Ohio.

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Kim Cooper Welcome

Kim Cooper Welcome

Welcome Kim Cooper

Welcome to the Team!

Kim Cooper has over 40 years of accounting and management experience with small and medium size companies and family owned businesses in the construction, coal and real estate industries. Over his career, Kim has developed strong leadership and communication skills dealing with owners and clients, other professionals, and management, support and operations staff.

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