CHAPTER 12:

COMPARATIVE DATA, FORECASTS, & BENCHMARKING

Part V: Plan, Monitor and Control Financial Operations

Using Comparative DataManagers use comparative data to set common

ground for planning, control and decision-making purposes.

Common Sizing

Common sizing puts data on the same relative basis.

Common Sizing: Example

Same Year for All Three HospitalsHospital 1 Hospital 2 Hospital 3

Current LiabilitiesLong-term debtTotal liabilities

$100,000 400,000$500,000

20%80%

100%

$500,000 1,500,000$2,000,000

25%75%

100%

$400,000 100,000$500,000

80%20%

100%

Common sizing converts numbers to percentages so that comparative analysis can be preformed. The worksheet below shows the assets of two hospitals.

Common Sizing: PracticeSame Year for both HospitalsHospital A Hospital B

Current AssetsProperty, Plant & EquipmentOther AssetsTotal Assets

$ 2,000,000 7,500,000 500,000$10,000,000

$ 8,000,000 30,000,000 2,000,000$40,000,000

20%75%

5%100%

20%75%

5%100%

Trend Analysis

Trend analysis compares figures over several time periods.

Trend Analysis: Example

Trend Analysis for LiabilitiesHospital 1

Year1 Year 2 DifferenceCurrent LiabilitiesLong-term debtTotal liabilities

$100,000 400,000$500,000

20%80%

100%

$500,000 1,500,000$2,000,000

25%75%

100%

$50,000 50,000

$100,000

50.0%12.5%

Trend analysis allows comparison of figures over time.

Trend Analysis: Practice

Hospital AYear 2

$ 2,000,000 7,500,000 500,000

$10,000,000

$1,600,000 6,000,000 400,000

$8,000,000

Current AssetsProperty, Plant & EquipmentOther AssetsTotal Assets

Year 1 Year 225%25%25%

$ 400,0001,500,000

100,000$2,000,000

$ 2,000,000 7,500,000 500,000

$10,000,000

$1,600,000 6,000,000 400,000

$8,000,000

Current AssetsProperty, Plant & EquipmentOther AssetsTotal Assets

DifferenceYear 1

Hospital A

Horizontal Analysis

Comparative Analysis of Operating Data

Refer to examples in this chapter.

Usually involves converted $ to %.

Called “horizontal analysis” because computation of the % is across, or horizontal.

Comparative Analysis of Operating Data

Vertical Analysis

Refer to examples in the chapter.

Usually involves converted $ to %.

Called “vertical analysis” because computation of the % is up and down, or vertical.

Forecasting Results

Short Range — Next year

Intermediate Range — 5 years from today

Long Range — The next decade and beyond

Managers can use three levels of forecasts:

Forecasting Results

Assumptions are the basis of the numbers in your forecast. Example:Computing a staff requirement of 3 lab technicians requires an assumption.Computing the salary and fringe benefits for each of the technicians requires another assumption.When the salary and fringe benefit dollars are computed for the 3 lab technicians, the resulting figure becomes part of your forecast.

Assumptions affect forecasted results.

Forecasting Results

Assumptions can be determined by

Trend Analysis

Payer Changes

Utilization Changes

Forecasting Results

Managers often have to prepare staffing forecasts

Watch forNon-Controllable Expense

ProblemsCapacity ProblemsLabor Market Problems

More details are in the chapter.

Forecasting Results

And always remember:Forecasting is an important part of

the budget process.

Other Performance Measures

A variety of performance measures must be in place for the organization.

Many types of such measures are available. Generally different organizations lean toward using one type over another.

Other Performance Measures

Adjusted performance measures over time.

We have previously discussed the advantages of comparative analysis — the comparison of various time periods, one to another. Measures that compare performance over various time periods are especially effective.

Figure 12-2 illustrates measures over time combined with a 2-part case mix adjustment.

Other Performance MeasuresFinancial Benchmarking

Benchmarking is the continuous process of measuring products, services, and activities against the best levels of performance.

The best levels may be found inside the organization or outside it.

Benchmarking

A financial variable reported in an accounting system.A financial variable not reported in an accounting system.A nonfinancial variable.

There are 3 types of benchmarks

Benchmarks are used to measure performance gaps.

Benchmarking

Studying the methods and results of your prime competitors;Examining the process of noncompetitors with a world-class reputation; orAnalyzing processes within your own organization that are worthwhile to replicate.

How do you benchmark? Three possible methods include:

Financial benchmarking compares financial measure among

benchmarking groups. It is the most common type of peer group method

used in health care.

Benchmarking

(Statistical benchmarking is another related method.)

See Table 12-6 for an example of financial benchmarking.

Measurement Tools

Pareto analysis is a measurement tool based on the Pareto Principle.

The Pareto Principle is often called the “80/20 Rule.”

For example, “80% of an organization’s problems are caused by 20% of the possible causes.”

Measurement Tools

The analysis quantifies these steps through construction of a Pareto diagram.

Pareto Analysis is an analytical tool that aids managers to improve some steps in

a process.

Figure 12-3 and accompanying text explain how to construct and interpret a Pareto diagram.

Measurement ToolsReporting by quartiles is an effective way

to show ranges of either financial or statistical results.

Quartiles are based on a quantitative method of computation and can effectively illustrate a variety of performance measures.

Chapter text plus Table 12-6 illustrate how to compute and construct a report using quartiles.

Performance MeasuresRemember, several types of

performance measures will be in use in the organization.

Familiarity with the use of such measures lets the manager do a better job analyzing performance.

Part VI: Allocate Resources and Acquire Funds

CHAPTER 17:

PUTTING IT ALL TOGETHER:CREATING A BUSINESS PLAN

The Business Plan

A business plan is usually prepared to obtain funding

and/or financing.

It is generally prepared in segments, as described in this chapter

Business Plan Elements

The organization plan

The marketing plan

The financial plan

Three major elements, or segments, of the business plan include:

Business Plan Construction Initial decisions about how to construct the business plan may ultimately determine the

project’s success or failure.

See Exhibit 17-1 for five important initial decisions. Your description of the service or equipment involved must be complete in all respects, per Exhibit 17-2.

Organization Segment This segment should describe the

management team and how the proposed service or equipment fits into the

organization.

See Exhibit 17-3 for six important items that should be included in your organization segment.

Marketing Segment This segment should describe the

available market, the portion of the market your service or equipment should attract,

and that portion of the market occupied by the competition.

See Exhibit 17-4 for six important items that should be included in your marketing segment.

Financial Analysis Segment This segment should contain the numbers that illustrate how the project is expected to operate over an initial period of time.

Choose a realistic period of time for your analysis.

Financial Analysis Segment

Simple: -Cash Flow Statement only

More extensive: -Balance Sheet -Income Statement -Cash flow statement

The financial analysis should contain a projection or forecast of operations that can be simple or more extensive. For example:

Cash Flow Statement This statement may be presented in a

condensed form within the business plan, with the detailed worksheets filed in the supporting work paper for the project.

See Exhibit 17-5 for six basic assumptions that are necessary for your cash flow statement.

Income Statement

Revenues and expenses have been discussed in a previous chapter. This statement will require a

series of assumptions to arrive at revenue, labor (by staffing projections), space occupancy, etc.

See Exhibit 17-6 for ten basic assumptions that may be necessary for your income statement.

Balance Sheet Assets, liabilities and net worth or equity

been discussed in a previous chapter. The balance sheet may also require capital

expenditure budget assumptions.

See Exhibit 17-7 for eight basic assumptions that may be necessary for your balance sheet, plus Exhibit 17-8 for equipment acquisition forecasting.

“Knowledgeable Reader”A well-constructed and well-written plan should answer questions that occur to a

knowledgeable reader.

Your plan, as written, should reflect the choices you have made in selecting its underlying assumptions.

Executive Summary

The executive summary should summarize the plan in no more

than one to two pages.

Some people like to write the summary first and then use it as a guide to construct the rest of the business plan.

Assembling the Plan

The plan should be assembled in a suitable report format. Your initial

decisions (see Exhibit 17-1) should have already determined the format.

See Exhibit 17-9 for a sample business plan format.

Presenting the Plan

You may have to present more than once, and circumstances may require that you prepare a long form (for one

presentation) and a short form (for another presentation.)

See Exhibit 17-10 for tips on business plan presentation.