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Part 3: Strategic Planning Financial Considerations

A break-even analysis and the integration of a budget are equally important to the success of your strategic plan. Part 3 of this series on strategic planning offers insight on both.

By: Bruce Maller, President and CEO, BSM Consulting™

To this point, I've been delineating the steps involved in successfully developing and implementing a strategic plan for your practice. As I mentioned in the last section, developing a plan tends to be easier for many practices than actually implementing the plan, consequently separating the "men from the boys."

A well-documented action plan, supported by strong physician leadership and staff involvement, is crucial to successful implementation of your practice's strategic plan. However, this alone will not necessarily bring success; rather, success calls for financial tools that will aid you in limiting risk and ensuring your strategic plan is having a positive financial impact on your practice.

Financial Tool 1: Break-Even Analysis

A break-even analysis will clarify whether planned objectives are viable. This tool is particularly useful for evaluating expansion opportunities, new capital purchases, new services, or new providers. A break-even analysis suggests what level of business activity is necessary to cover expected costs. Cost categories generally include fixed and variable expenses.

Fixed expenses usually do not vary with the volume of patients treated. However, there is a limit to how much volume can be handled with a certain level or amount of fixed overhead. If the volume goes up or down significantly, it may be necessary to either increase or reduce overhead. Examples of fixed overhead include facility rental, most staffing costs, and insurance. On the other hand, variable overhead expenses are proportional to the level of business activity. An example is the cost of goods associated with the sale of retail products. Variable expenses will fluctuate with the number of patients treated or with the amount of revenue generated by the practice.

The break-even analysis is an attempt to determine if the proposed activity is financially viable. In financial terms, the analysis will assist in determining the level of business activity necessary to cover the associated fixed and variable costs of the venture. For example, the sample break-even analysis for addition of a new physician on the next page indicates the practice will need to see 2,500 new encounters at a revenue rate of $100 per encounter to cover expected fixed and variable costs.

Financial Tool 2: Integrating a Budget into the Planning Process

As I have previously mentioned, a budget is a critical component of the strategic plan. It is the tool that can assist in evaluating the financial impact of the initiatives discussed during the planning meeting. A budget provides an important contextual setting for each objective. Once an initiative has been defined and the financial analysis completed, practice stakeholders can act in a decisive and timely manner. Practices that recognize, develop, and apply rigorous financial analysis consistently achieve greater success. It is not uncommon for practices to consider a potential opportunity, only to have analysis indicate that the risk contemplated is too great in relation to the potential benefit. Development of a budget generally includes the following four components.

Examination of Historical Data and Production Information. It is normally recommended the budgeting process begin in the practice's fourth fiscal quarter. This allows for the availability of ninth-month data and feedback from the strategic planning meeting. Historical review should include an examination of revenue by provider and by key service line or location. In addition, a line-item assessment of the profit and loss statement is recommended. Rather than look at categories of revenue or expense and apply a percentage adjustment factor for the next fiscal year, it is recommended a more "bottoms up" approach be applied. Avoid the assumption that the way things were done in the past is the way things should be in the future.

Assessment of Future Changes. A strategic plan provides a blueprint of the goals and objectives the practice may want to pursue in the future. Each of these opportunities must be evaluated within the context of the potential impact on revenue, physician schedules, capital expenditures, staffing, marketing, space and equipment leases, etc. Utilizing conventional spreadsheet software such as Microsoft Excel, a practice can look at the "before and after" financial impact of the proposed action items. Specifically, the analysis should allow owners to see the bottom-line impact of each proposed initiative, as well as the overall plan.

Forecast of Revenue and Expense. Exhibit 2 provides an example of a forecasting tool that illustrates the economic impact of dispensing cosmeceutical products within the practice. As illustrated, the analysis begins with a projection of the number of internal female patient visits, utilizing a 15 percent conversion rate and an average patient purchase amount of $71. These assumptions yield a projected revenue rate and cost of goods sold per patient. Forecasting of operating expense is done for each line item. An estimate of capital expenses, i.e., build-out costs, equipment, and display cases, must also be provided. As illustrated, the projection indicates that, based on the assumptions, dispensing cosmeceutical products would generate an approximate 38 percent operating profit margin.

Integrating the Budget with Financial Reporting. As mentioned, there needs to be a financial scorecard for practice initiatives otherwise agreed to by the shareholders. With the forecast in hand, it is important to integrate the budget into the practice's financial reporting. In this manner, actual results can be compared to forecast and the group can better measure success. Furthermore, those responsible for implementation of the initiative and management of the operating functions can be managed in a more objective fashion. The sample comparative income statement on the next page illustrates an actual budget reporting format.

Dispensing Cosmeceutical Products Forecast


Make It Happen

Strategic planning will bring order, discipline, and focus to practice shareholders and will ultimately help your practice meet and perhaps exceed its goals. In these three articles, we've looked at what it takes to develop and successfully implement a practical, achievable strategic plan for your practice. Now it's your turn to make it happen.

Having a clear practice strategy is a key factor in achieving success. Along with having a well-documented action plan, a strong physician leadership team, and a committed staff, financial tools can provide an important control mechanism to limit risk. At the same time, integrating a practice budget into the financial reporting process can provide a guidepost to ensure there is direct linkage between the strategic plan and the operating results of the practice.

2002 Comparative Income Statement
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