Strategic Financial and Capital Planning · Strategic Financial and Capital Planning ... auditing,...

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CLAconnect.com

Strategic Financial and Capital Planning

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CHAD D. KUNZE, CPA PRINCIPAL – HEALTH CARE CliftonLarsonAllen LLP – Phoenix, AZ

Chad D. Kunze, CPA is a principal in the health care group at CLA, focusing his time on serving senior health and aging services clients. He leads the health care practice for the Southwest Region. Chad is a certified public accountant with more than 20 years of experience in public accounting, auditing, and business consulting devoted entirely to the health care industry. He also provides regular consultation regarding financial client service and Medicaid/Medicare reimbursement consulting for various health care providers around the country. Chad has also focused his efforts in auditing and consulting with various HUD financed projects and facilities around the country. Chad has completed audits and reviews for numerous health care and HUD financed housing organizations. His background includes highly developed expertise in audits of senior living and long-term health care organizations, CCRC’s and HUD/Single Audit engagements. He also provides operational and financial consulting services to nursing facilities, home health agencies, CCRC’s, therapy providers, assisted living, developmentally disabled and senior housing facilities. During the past two years, Chad has focused on the various opportunities and challenges for providers related to health care reform and payment reform. Due to the changing environment within healthcare, He has presented for many clients, boards of directors, associations and other groups as to the impact of health care reform now and into the future. Chad is an active member of the American Institute of Certified Public Accountants as well as other State Societies of CPA’s. He has been an active member of LeadingAge, AHCA, LeadingAge-Arizona, Arizona Health Care Association, Arizona ALFA, LeadingAge-California, LeadingAge-Colorado, LeadingAge-Missouri, LeadingAge-Kansas, LeadingAge-Ohio, Life Services Network, and various other industry associations related to aging services and senior housing options throughout the country.

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DENNIS MASCHKE, CPA Manager CliftonLarsonAllen LLP – Phoenix, AZ

Dennis is a Manager in CliftonLarsonAllen’s State and Local Government Group. Dennis has been with CliftonLarsonAllen for eight years and dedicates 100 percent of his time to serving government clients, including those requiring compliance audits under OMB Circular A-133. Dennis’ previous experience includes compilation of financial statements, reconciling accounts, preparing audit documentation, consulting engagements, and other agreed upon procedures. Dennis is currently responsible for overseeing government audits, supervising staff, compiling financial statements, client relations, and outsourcing/consulting engagements. Dennis graduated from Michigan State University with a bachelors of arts in accounting and later went on to obtain his Masters in Business Administration from Davenport University in Michigan. He is currently in the process of completing his exams to be a Certified Governmental Financial Manager. He is a member of the American Institute of Certified Public Accountants, Arizona Society of Certified Public Accountants, and is a certified public accountant in the State of Arizona.

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Objectives

Importance of Strategic Planning – it’s not just budgeting

A proven process for success

Tools important but process is key!

Recurring process – not placed on the shelf to accumulate dust

Applicable to Non-Profits and Governmental Entities

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STRATEGIC CONSIDERATIONS

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Solving the Puzzle

Market/ Economy

Operations

Mission

Strategy

How do you make sure the financial piece of the puzzle fits?

Finance

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Market Driven, Financially Viable

WHAT WE

CAN DO

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How Do We Do More?

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How Do We Do More?

WHAT WE

CAN DO

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Life Cycle With No Repositioning

Strength

Weakness

Time Financial Viability

Market Defendability

When the Market Position First Declines, the Finances still

increase.

Once the market position deteriorates and affects occupancy the financial position starts a rapid decline!

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Strength

Weakness

Time Financial Viability

Market Defendability

Life Cycle With Repositioning

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Repositioning From Financial Strength

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LLP Implication of Change - Sigmoid Curve

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Best Place to Start New Curves

Decline

Initiation

Initial Challenges

Growth and

Success

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LLP Potential Courses of Action- From Strength

Do Nothing

Strong Metrics

Market Need Served

Low Probability of New Entrants

Assets Meet Needs

Reposition

Market/Service Opportunities

Balance Sheet Strength

Repositioning Stabilizes/Improves

Credit

Adequate Capital Capacity

Expand What We

Do

Multi Site

Different Geography

Acquire Others

New Business Ventures

Entrepreneurial

Additional Market Needs

Increased Risk

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Occupancy is down, but the good news is:

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operating costs were really low…

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LLP Potential Courses of Action- In Decline

Repositioning

Market/Service Opportunities

Balance Sheet Strength

Repositioning Stabilizes/Improv

es Credit

Adequate Capital Capacity

New Debt/Equity

Ability to stabilize credit

Provide savings from better

capital structure

Improve Capital

Capacity

Restructuring

Inability to improve

financially

Limited Market/Service Opportunities

Buy Time for “Plan B”

No Capital Capacity

Sale/Affiliation

Limited Market/Servic

e or lack of Capacity to

Access Growth

No Capital Capacity

Bankruptcy

Last resort

Failed Restructuring

Limited Capital Capacity Exiting

Bankruptcy

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LLP Financial Ratios– What Do They Tell Us?

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TODAY

How have we done in the past?

Liquidity and Capital

Ratios

Operating Ratios

Where are we

headed?

PAST FUTURE

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150 Days

60 Days

0 Days

350 Days

Liquidity- Days Cash on Hand

STAY OPERATIONAL

WEATHER A STORM

ACT STRATEGICALLY

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LLP CCRCs -Key Financial Drivers- Ideal Balance?

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Operating Revenue and Expenses

State and Federal Funding

Contributions/ Fund Raising

Investment Income

High Low Managerial Control

Relia

nce

on D

river

Low

High

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Key Government Ratios

Quick Ratio

Average Receivable Collection

Period

Earnings Margin

Budgetary Cushion

Debt Service Burden

Cash & Equivalents + ST Investments Current Liabilities

Ending Receivable Revenues/365

Change in Net Position Operating Revenues

Total Unrestricted Fund Balance Revenues & Transfers

Total Debt Service Requirements Revenues

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CLA Intuition™ Strategic Capital Planning

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A Change in How We Plan

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LLP 5 Steps to Strategic Success

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1. Establish the Baseline

Provide financial feedback relative to current performance

Must look long-term for there to be value in the process

Must define the “status quo” strategically

An opportunity to understand current and expected financial performance

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1. Establish the Baseline (cont’d)

Higher Accuracy

Short Term

Horizon

Lower Accuracy

Long Term

Horizon

Budgets

Short term planning

EVEN THOUGH LESS ACCURATE…CRITICAL TO COVER LONG TERM

Long term strategic planning

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Revenue Expenses Funding

Occupancy Rates Mix Entrance Fees

Operations Interest

Contributions Debt Equity

Capital

Routine

What is the Status Quo?

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2. Establish Financial Targets

Determine what financial metrics are important

Define your organization’s targets •Each organization is different •Financial covenants are the FLOOR

Provides an opportunity to build consensus around how strong we want to be financially

Establishes the ground rule for future financial work and evaluation of strategic initiatives

Targets are not “set in stone” but must be discussed if changed

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2. Establish Financial Targets Upfront (cont’d)

Actuarial Targets

Margin Targets

Liquidity Targets

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2. Establish Financial Targets Upfront (cont’d)

• Establish Goals Upfront

• Short Term and Long Term

Set Targets

• Use Targets to Plan

• Understand Direction

Chart the Future • If Targets not met,

agree on solutions • Re-evaluate

targets

Revisit Outcomes

Targets establish financial discipline and planning trip wires”…it sets the stage to have a “value” discussion regarding strategies vs. hoped for financial targets and results.

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3. Evaluate Capital Capacity

Evaluate capital capacity based on

targets

Understand general direction of financial

performance Are results acceptable?

Are we generating sufficient “excess capacity”? •What needs to change if not?

How are monies being committed or

assigned?

Is there a fund established for

these future projects?

Governance and/or voter

approval

Expenditure Limitation

State of Federal Grant

Funding Available?

General Considerations

Government Considerations

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3. Evaluate Capital Capacity (cont’d)

Helps gauge how the organization generates resources that it can use to: reinvest in programs or facilities or

strengthen balance sheet and financial performance

Capital capacity is derived based upon the EXCESS liquidity and EXCESS borrowing capacity, above targeted Days Cash on Hand and Debt Service Coverage Ratios

Step #2 was used to establish the “targets”

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EXAMPLE Days Cash on Hand

Target

Excess Liquidity

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“Affordable” Capital Capacity

Debt

Revenues

Debt

Cash Flows (Profitability)

Income Statement Strength

Debt

Cash Reserves

Debt

Net Assets (Equity)

Balance Sheet

Strength


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Capital Capacity

Annual Income

Available For Debt Service

Financial affordable capital capacity is directly correlated to internal financial targets and future expectations of the organization

Target DSCR

Existing Debt Service

BORROWING CAPACITY

Beginning Unrestricted

Cash & Investments

In- flows

Out- flows

Ending Cash

Target Reserves

Defining Affordable Debt and Capital Capacity

EXCESS LIQUIDITY

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LLP What Impacts “Capital Capacity”?

Repairs and Maintenance Yes No Capital Capacity Impact Reposition, Renovate, Replace Yes No Capital Capacity Impact Level of fee increase Yes No Capital Capacity Impact Adjustment in pricing Yes No Capital Capacity Impact Adding staffing position Yes No Capital Capacity Impact Adjustments to reimbursements Yes No Capital Capacity Impact Changes in investment returns Yes No Capital Capacity Impact Changes in market/economy demand Yes No Capital Capacity Impact Changes in funding Yes No Capital Capacity Impact Refinancing debt Yes No Capital Capacity Impact Changes in cost of capital Yes No Capital Capacity Impact Changes in direction/administration Yes No Capital Capacity Impact Expenditure limitation Yes No Capital Capacity Impact State of Federal Grant Funding Yes No Capital Capacity Impact

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4. Evaluate Strategies

Determine Strategic

Needs

Profit Strategy

Measure Impact of Strategy • Individual •Aggregate

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4. Evaluate Strategies (cont’d) Examples: Higher levels of capital

4 Rs (Repair, Renovate, Reposition, Replace)

Addition (or Reduction) of existing services/buildings Operational efficiencies Bundling vs. Unbundling of Services Re-pricing of services Expand outreach Increases/Decreases in labor pools Healthcare Reform and ACA impact Changes in funding/contributions/reimbursement

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LLP 4. Evaluate Strategies (cont’d)

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Sample Community Strategic Financial Planning Model

2014 PERFORMANCE

($1.4M) / -9.1% 2014 Operating Margin

Basis = 2014 Budget

REVENUE AND EXPENSE INFLATION

2015 2016+ 2015 2016+ 2015 2016+

Skilled NursingMedicare 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

Medicaid 3.00% 3.00%

Private & Other 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

CONTRIBUTIONS$250k Contributions (2015) $250k Contributions (2016+) 0.0% Inflation (2017+)

INVESTMENT RETURNS3.00% Overall Returns (2015 - 2017) 3.00% Overall Returns (2018+)

ENTRANCE FEES 2014 Budget inflated 3.00% annually - $2.2M - $2.9M

CAPITAL SPENDING Book to Mgt Projection Cash & Investments: $27.1M $27.0M

Routine Capital = $836k in 2015 to $1,060k in 2023 Yrs 1 - 5 (6.0% of Rev.) / (59.6% of Dep.) Yrs 6 - 10 (6.0% of Rev.) / (62.4% of Dep.)

Labor

Non-Labor

Revenue Inflation Expense Inflation

Independent Living

Assisted Living

631 613 596 580 564 550 535 522 509 496

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Days Cashon Hand

1.49x 1.43x 1.48x 1.51x 1.53x 1.55x 1.58x 1.60x 1.63x 1.66x

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

DebtService

Coverage(MADS)

-7.4% -7.4% -7.4% -7.4% -7.4% -7.4% -7.4% -7.4% -7.4% -7.4%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

NetOperating

Margin

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

0.0%

2015 2016 2017 2018 2019 2020 2021 2022 2023

Net InflationarySpread (%)

Set Baseline

-0.9% -1.4% -0.8% -0.6% -0.5% -0.3% -0.2% -0.1%

0.0% 0.1%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Net…

Sample Dashboard- Operations

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Sample Dashboard- The “Baseline”

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4: Evaluate Strategies-(continued) Example

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Sample Dashboard- With Strategies

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4: Evaluate Strategies-(continued) Example

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Step

1

Step

2

Step

3

LEVEL

4

LEVEL

5 START IMPLEMENTING

Revisit Targets

Prioritize Strategies

Revisit Strategies

Revisit Baseline

5: Identify Shortfalls and Create a Plan to Bridge Gaps

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• Can validate plans • Can “dream”… and chart a path to achieve the

dream Mission

• Can help build consensus around strategic imperatives

• Can help create understanding of collective challenges

Leadership

• Can help build consensus around operating discipline Conduct of Operations

• Protect and enhance resources needed for mission • Resource allocation amongst competing needs • Capital investments are appropriate

Fiduciary

• Organizing board to carry out functions of governance

Board Organization and Development

A Proven Approach

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CLAconnect.com

twitter.com/ CLAconnect

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linkedin.com/company/ cliftonlarsonallen

Chad Kunze, CPA Principal [email protected]

602-604-3534 Dennis V Maschke, MBA, CPA Manager [email protected] 602-604-3623

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http://www.twitter.com/CLA_CPAs

http://www.facebook.com/CliftonLarsonAllen

http://www.linkedin.com/company/cliftonlarsonallen

Strategic Financial and Capital Planning · Strategic Financial and Capital Planning ... auditing,...

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Transcript of Strategic Financial and Capital Planning · Strategic Financial and Capital Planning ... auditing,...