1. CHAPTER 12: COMPARATIVE DATA, FORECASTS, & BENCHMARKING Part V: Plan, Monitor and Control Financial Operations

2. Using Comparative Data Managers use comparative data to set common ground for planning, control and decision-making purposes.

3. Common Sizing Common sizing puts data on the same relative basis.

4. Common Sizing: Example Same Year for All Three Hospitals Hospital 1Hospital 2Hospital 3 Current Liabilities Long-term debt Total 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.

5. Common Sizing: Practice Same Year for both Hospitals Hospital AHospital B Current Assets Property, Plant & Equipment Other Assets Total 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%

6. Trend Analysis Trend analysis compares figures over several time periods.

7. Trend Analysis: Example Trend Analysis for Liabilities Hospital 1 Year1Year 2Difference Current Liabilities Long-term debt Total 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.

8. Trend Analysis: Practice Hospital A Year 2 $ 2,000,000 7,500,000 500,000 $10,000,000 $1,600,000 6,000,000 400,000 $8,000,000 Current Assets Property, Plant & Equipment Other Assets Total Assets Year 1Year 2 25% $ 400,000 1,500,000 100,000 $2,000,000 7,500,000 500,000 $10,000,000 $1,600,000 6,000,000 400,000 $8,000,000 Current Assets Property, Plant & Equipment Other Assets Total Assets DifferenceYear 1 Hospital A

9. 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.

10. 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.

11. 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:

12. 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.

13. Forecasting Results Assumptions can be determined by Trend Analysis Payer Changes Utilization Changes

14. Forecasting Results Managers often have to prepare staffing forecasts Watch for Non-Controllable Expense Problems Capacity Problems Labor Market Problems More details are in the chapter.

15. Forecasting Results And always remember: Forecasting is an important part of the budget process.

16. 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.

17. 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.

18. Other Performance Measures Financial 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.

19. 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.

20. Benchmarking Studying the methods and results of your prime competitors; Examining the process of noncompetitors with a world-class reputation; or Analyzing processes within your own organization that are worthwhile to replicate. How do you benchmark? Three possible methods include:

21. 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.

22. 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.”

23. 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.

24. Measurement Tools Reporting 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.

25. Performance Measures Remember, 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.

26. Part VI: Allocate Resources and Acquire Funds CHAPTER 17: PUTTING IT ALL TOGETHER: CREATING A BUSINESS PLAN

27. 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

28. Business Plan Elements The organization plan The marketing plan The financial plan Three major elements, or segments, of the business plan include:

29. 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.

30. 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.

31. 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.

32. 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.

33. 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:

34. 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.

35. 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.

36. 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.

37. “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.

38. 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.

39. 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.

40. 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.