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Forecasting for Financial Recovery
As practices shift out of survival mode and have a better picture of what the rest of the year will look like, the need for financial discipline is more important than ever before. While practices focused on cash flow management before the pandemic, it was not necessarily the top priority. That was because patient volume and revenue were relatively easy to project, and there was not much concern around not meeting expense obligations and being profitable.
Today that mindset may not serve us well, with cash flow no longer steady or as predictable. For that reason, as practices look to regain their footing, proper and rigorous planning is a must. Everything from bringing back staffing levels and making operational changes to ensuring safety must be considered from the financial perspective.
To be successful in the current business environment, financial health must be the top priority. This means having a plan to project revenue and expenses even though it is uncertain what the future holds. The most effective way to do this is by creating an operating forecast. Similar to creating a budget, an operating forecast is a financial roadmap for a defined period of time where businesses project (as best they can) revenue, expenses, net income, and, ultimately, the business's cash flow.
Forecasting is as Easy as 1, 2, 3
While the forecasting process will take some time to complete, once the necessary data is gathered, the process should be relatively simple to execute and manage on an ongoing basis. Below are the steps to take in creating an operating forecast.
1. Gather data. The first step in the forecasting process is gathering the necessary data to complete the exercise. The main information needed is the practice’s profit and loss statement (P&L), broken out by month, for all of 2019 and year-to-date 2020. It is also important to include individual provider or service line revenue and payroll summary reports for the same time period. This information will allow practice leadership to analyze pre-COVID trends as well as how revenue and expenses have been impacted in the past few months. Using the above-mentioned data to create monthly averages from before the pandemic will serve as the forecast's baseline.
2. Forecast revenue and expenses. Knowing the practice’s baseline, next, it is time to calculate practice finances moving forward. This requires taking a close look at the practice’s incoming and outgoing money.
- Revenue: With data now gathered on overall income, the next step is to look at the different revenue sources of the practice and begin to project the “ramp-up” rate for the coming months, factoring in variables such as provider or facility capacity changes. While keeping this at the practice level is a good starting point, leadership will find the most benefit when this can be drilled down to the individual provider or service-line level. This level of specificity will require input from all involved individuals to make sure assumptions are realistic.
- Expenses: When forecasting expenses, look at each category on the P&L to assess whether future needs are based on our new reality. Start with the largest expenditure categories such as provider and non-provider staffing expenses, especially since many practices have changed those areas during the pandemic. Next, move on to other areas such as occupancy expenses, medical and office supply costs, and vendor obligations. While the practice will likely not achieve efficiencies in every area right away, try to make appropriate and timely changes throughout the forecasting period to continue to eliminate unnecessary expenses.
3. Review and update monthly. Now that the forecast is setup treat it as a living document. It is important to meet with team members regularly to review actual results compared to the forecast and fine-tune future assumptions based on new developments. Like any project, consistent communication with the organization's key stakeholders will likely yield a more successful result.
Benefits of Forecasting
Relative to the effort involved in the forecasting exercise, practices can derive significant benefits, including:
- Heightened discipline. Operational forecasting includes a thorough review of historical results in addition to assessing upcoming activities that impact performance. Be sure to include owners and administration in the thorough review of these areas to have a better picture of the future. This close review of performance creates a discipline level that will allow the practice to come out of the crisis in a stronger position.
- Improved adaptability. As many businesses have learned, there will be many starts and stops during the recovery process. By regularly reviewing actual vs. forecasted results, practice leadership has the ability to deal with the good and bad, such as patient volume increasing more rapidly than expected, unexpected staffing changes, and the need to change the physical flow of facilities. When leadership reviews the forecast frequently, the practice gains the ability to quickly flex when the unexpected happens and avoid longer-term impact.
- Encouraged reinvention. For many practices, this crisis has forced them to think differently about the way they operate and to explore ways to reinvent their businesses for the better. As a result of the forecasting process, there are many examples of this: Some practices are now creating individualized business plans for new providers to grow their own book of business, reconfiguring staffing models to better support forecasted patient volume, enabling non-clinical staff to work from home, and embracing telemedicine as a long-term strategy. Being successful in any of these new initiatives requires a detailed understanding of the business's current financial health and its impact on the efficiency and profitability of the practice in the long run.
While numerous templates are available to help businesses get started on their forecasting, BSM has created a new financial resource specifically designed for health care practices called the “Operating Forecasting Tool.” This template allows practices to establish a baseline (by exporting historical financial statements from their accounting system) before forecasting revenue and expenses every month for the remainder of 2020. The resource includes detailed instructions, which, combined with the tips in this post, will help practices be quickly on their way to building their forecast for the future — whatever it may bring.
WE CAN HELP. Our consulting team is available to answer any of your forecasting questions. To schedule a call or discuss our Operating Forecasting Tool, contact firstname.lastname@example.org.