Intro to Finance€¦ · Presentation Objectives ... April 12, 2016. Presentation Agenda Organizational value Financial statement basics Financial statement analysis Communicating

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Intro to FinanceMissouri Health Care Association

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INTRODUCTION

Presenters

Al Jones, CPAHealthcare Consulting Manager for Mueller Prost LC

©2016| Mueller Prost | Slide 3‘How To” Facility Finances | April 12, 2016

Presentation Objectives

This presentation will provide the following:

Insight into what creates value within a facility

Tools and techniques for analyzing your current financial situation

Insight into financial data and the financial impact of changes

An understanding of the true cost of certain decisions

Tips for communicating the case for change in financial terms

Tips for involving the right people within the organization when making decisions with a financial impact


Presentation Agenda

Organizational value Financial statement basics Financial statement analysis Communicating change Insight for managing revenue Insight for decreasing expenses BudgetingQuestions


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ORGANIZATIONAL VALUE

The Mindset

Think about the last time you started something significant in your lifelike a diet, workout program, or relationship…

• Did you start with what you knew?• Did you gain knowledge along the way?• Did the knowledge that you gained change your behavior?

Think about when you started your business or current job…• Did you start with what you knew?• Did you gain knowledge along the way?• Did the knowledge that you gained change your behavior?

Maya Angelou said:“I did then what I knew how to do. Now that I know better, I do better.”

©2016| Mueller Prost | Slide 7Intro to Finance| April 12, 2016

The Mindset


Now that I know better, I can do

better.

FROM TO

The Mindset


• Flat or declining revenue• Inconsistent, unpredictable cash

flow• Unmanaged receivables and

payables• Reactive inventory and supplies

management• Weak or unproven internal

controls• Inconsistent service quality• Extensive training time• High employee turnover• High dependence on a few

individuals• Limitations on the availability of

meaningful, timely financial information

• Planned revenue growth• Predictable and improved cash

flow• Managed working capital• Proactive inventory and supplies

management• Strong, tested internal controls• Consistent service quality• Streamlined and documented

processes and procedures• Happy, diversified, and skilled

workforce• Meaningful and timely

information available to manage the organization

• A succession plan• Increased organizational value

Where Can Value be Found or Lost?


Your Organization

Financial & Tax Planning

Business Risk Management & Internal Controls

Cash Management and Access to

Capital

Management Goals & Strategy

Human Capital

Supply Inventory &

Care Management

Service Offerings & Marketing

ManagementInformation Systems & Reporting

Organization StructureFinancial & Tax

Planning

Business Risk Management & Internal Controls

Cash Management and Access to

Capital


Human Capital

Supply Inventory &

Care Management

Service Offerings & Marketing

ManagementInformation Systems & Reporting

Organization Structure

Industry EnvironmentMacro Environment

Key Areas


• Federal and state tax planning• Sales and use tax• Strategic planning• Tax credits and incentives• Benchmarking

Financial & Tax Planning

• Risk identification• Budgeting• Internal controls• Susceptibility to fraud

Risk Management

& Internal Controls

• Equity• Debt• Lender relationships• Cash management• Working capital• Forecasting

Cash Management and Access to Capital

• Planning procedures• Short- and long range planning• Markets to be served• Profitability• Growth• Continuity


• Management• Communications• Recruiting / hiring / training• Compensation and benefits• Motivation• Planning and utilization• Environment

Human Capital

• Supplies and scheduling• Quality of care• Facilities• Logistics• Storage

Supply Inventory &

Care Management

Key Areas


• Structure• Organizational chart• Policy manual• Executives and key employees• Authority and responsibility• Standard operating procedures

• Accounting system• Financial statements• Other system considerations• Management reports• Key performance indicators• Utilization of information

Management Information Systems & Reporting

Organization Structure

• Service development• Industry trends• Competition• Reporting on development• Diversification• Lease vs. buy

Service Offerings

• Marketing plan• Service planning• Pricing• Promotion• Delivery of service• Revenue development

Marketing

How do I Unlock Opportunities

Benchmarking Comparing expected performance to actual (&

understanding gaps) Reviewing key processes (continually) Assessing business and operational risks (impact vs.

likelihood) Collaborating with management team members Planning strategically and tactically Fostering relationships with key advisors (CPA, attorney,

banker, insurance, financial planner)


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FINANCIAL STATEMENT BASICS

Why Understand Financial Statement?

To better understand how your work contributes to the organization’s success

To help make informed, intelligent decisions affecting the success or failure of operations

To enable a company to prepare for the future

To lay the foundation for budgeting and controlling costs

To understand how others will measure your company (i.e. scorecard)

To identify issues, implement corrective actions and improve operations


Basic Financial Statements

Balance Sheet(Statement of Net Position)

Income Statement (Statement of Activities/Operations)

Statement of Stockholders’ Equity

Statement of Cash Flows


Basic Financial Statements12/31/15

Balance Sheet – a quantitative summary of an entity’s financial condition at a specific point in time. • Assets (1)• Liabilities (2a,2b,2c)• Equity (3)• Assets = Liabilities + Equity


Balance Sheet – Assets12/31/15

Current Assets (4) – resources available for use within one year.• Cash, receivables, inventory, prepaid expenses, short term

investments.

Fixed Assets (5) – owned tangible property used for business and not expected to be consumed within one year.• Land, property, equipment, less accumulated depreciation

Long Term Investments – stocks, bonds, cash, etc., intended to be held for more than one year.

Intangible Assets (6) – Assets that are not physical in nature. • Goodwill, patents, copyrights


Balance Sheet – Liabilities & Equity12/31/15

Current Liabilities (7) – amounts owed to others within one year.• Accounts payable, accrued payroll, line-of-credit, current portion

of debt

Long Term Debt (8) – financing obligations lasting more than one year. • Notes, mortgages, loans

Other Long Term Liabilities (9) – deferred expenses, pension obligations

Equity (10) – difference between total assets and total liabilities• Retained earning, current profit/loss, owner’s equity


Basic Financial Statements1/1/15‐12/31/15

Income Statement (Statement of Activities/Operations) – a summary of revenues and expenses activity for a given period of time.• Monthly, Quarterly, Annually• Comparative, Consolidated, Combination• Revenues – Expenses = Profit/(Loss)


Basic Financial Statements1/1/15‐12/31/15

Key components:

Revenue (11) – the income generated from the sale of goods an services associated with the main operations of an organization.

Expense (12) – the money spent or cost incurred to generate revenue (e.g. costs of doing business).

Operating Income (13) - the income resulting from primary business operations.

Pre-tax Net Income (14) – the total revenue in an accounting period minus all expenses, excluding income tax, during the same period.

EBITDA – the profit a company has before interest, taxes, depreciation and amortization are deducted from net income.



Statement of Stockholders’ Equity – a statement showing the beginning balance, additions to and deductions from, and the ending balance of the equity account for a specific period.

Key components• Beginning balance• Net income• Additional paid-in capital• Proceeds from shares sold• Distributions• Ending balance (15)



Statement of Cash Flows – a summary of the sources and uses of cash for a given period

Key components of a statement of cash flows• Cash flows from operating activities• Cash flows from investing activities• Cash flows from financing activities



Cash Flows from Operating Activities (16) Represents the money the company received from its actual business

operations Excludes cash received from other sources, such as investments Starts with net income (from the income statement), then adds back in any

depreciation expenses, deferred taxes, accounts payable and accounts receivables, and one-time charges

Cash Flows from Investing Activities (17) Represents the money the company has received (or lost) from its investing

activities Includes money that the company has made (or lost) by investing its excess

cash in different investments (stocks, bonds, etc.); money the company has made (or lost) from buying or selling subsidiaries; and all the money the company has spent on its physical property, such as plants and equipment



Cash Flow from Financing Activities (18) Represents the money the company took in and paid out in

order to finance its activities Calculates how much money the company spent or

received from its stocks and bonds Includes any dividend payments that the company made to

its shareholders; any money that it made by selling new shares of stock; any money it spent buying back shares of its stock; any money it borrowed; and any money it used to repay money it had previously borrowed


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SNF INCOME STATEMENT

SNF Financial Statements

Key components of a SNF income statement• Revenue

o Room & boardo Ancillaryo Other revenueso Contractual allowanceo Bad debts

• Expenseso Patient careo Ancillaryo Capitalo Administrationo Shared expenseso Other expenses


Income Statement ‐ Revenues1/1/15 – 12/31/15

Room & Board – includes routine care $191.94ppd (2014), $189.43ppd (2013)

Ancillary – therapy, lab, x-ray, billable supplies and drugs $32.01ppd (2014), $30.28ppd (2013)

Other Revenues – meals, barber, interest income, donations

Contractual Allowance Bad Debts (deduction from revenue for MO Medicaid)


Income Statement – Expenses1/1/15 – 12/31/15

Patient Care – nursing, social services, activities, dietary, routine supplies - $88.91(2014), $88.06(2013)

Ancillary – therapy, lab, x-ray, medical supplies & drugs sold, laundry, housekeeping, barber - $20.26 (2014), $20.07 (2013)

Capital – rent, amortization, depreciation, capital interest, real estate taxes, capital insurance - $15.57 (2014), $15.09 (2013)

Administration – maintenance, administration, utilities, management fees, advertising, travel, entertainment, legal, accounting, loss on disposals - $35.58 (2014), $34.59 (2013)

Shared expenses – payroll taxes, workers compensation, employee benefits

Other expenses – bed tax, income tax, contributions, penalties


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FINANCIAL STATEMENT ANALYSIS

Financial Statement Analysis

Internal• Trend analysis• Budget-to-actual• Ratio analysis

External• Benchmarking• Ratio analysis


What is Benchmarking?

The process of identifying and capturing data and evaluating this data against oneself or an outside party (internal or external).

Types of benchmarking

• Performance (e.g. financial)• Process (e.g. best practices)• Strategic (e.g. comparison to competitors)


Why is Benchmarking Important?

During a 2008 survey conducted by Deloitte Development LLC, organizations were asked, “How best could benchmarking potentially help your organization?”

46.1% responded that it could help identify and quantify potential improvement opportunities (i.e. lower costs, improved efficiencies)

21.8% responded that it could help set reasonable, attainable performance goals and analyze trends from one year to the next

13.0% responded that it could help establish targets that make sense and evaluate the accuracy of forecasts

19.2% responded that it could help perform competitive analysis that leads to fast, meaningful improvement


Why is Benchmarking Important?

Benchmarking assists organizations: Identify opportunities to reduce costs Identify opportunities to increase quality of service Gain insight into relative strengths and weaknesses compared

to other organizations Combat organizational complacency and the perception that

current performance is acceptable Change the way it views its performance by providing both

qualitative and quantitative measures of effectiveness Move beyond an assessment that is based solely on opinion Support the need for a transformation of processes or even an

entire organization


Financial Ratio Analysis

Current ratio = current assets/current liabilities

Working Capital = current assets – current liabilities

AR Days = (avg AR/revenue)*365

Debt to Equity ratio = total liabilities/total equity

Profit margin = profits/sales


Understanding Profitability

Revenue sources – goal is to increase/maximize• Patient days• Pricing• Reimbursement rate

Expense – goal is to decrease/minimize• Cost drivers• Wages• Supplies• Services• Other• Variable vs Fixed• Expense vs Investment


Medicaid Reimbursement2012

Average PPD Expense Missouri $160.07 Kansas $160.23 Illinois $155.55 Iowa $188.27 Kentucky $192.38 Wisconsin $196.34

Average MCD Reimbursement Missouri $141.31 Kansas $150.41 Illinois $132.49 Iowa $154.31 Kentucky $178.03 Wisconsin $156.23


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COMMUNICATING CHANGE

Communicate Change

Where are we now? Where are we going? Where do we want to go?

• Goal setting (SMART)o Specifico Measurableo Attainableo Relevanto Timely


Communicating Change

Increase Revenue

Decrease Expenses

Track performance for improved results

Cost vs Benefit analysis


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REVENUE AND EXPENSE MANAGEMENT

Managing costs to increase reimbursement

Front office operations – Where do you start? Billing• Identify patient/resident pay source: Medicare,

Medicaid, Commercial Insurance, LTC insurance• What are you billing for? Skilled care? Room and

Board? • Are you capturing all the ancillaries? Labs, therapy

services, x-rays, medications?• Are the ancillaries part of a per diem rate for Medicare,

commercial insurance (Medicare Advantage)



Correct classification –Putting expenses where they belong • Accounts payable are more than just paying bills – they

affect your cost report!• Are you coding expenses to the right accounts? Or just

the accounts where you have a budget?• Who is actually responsible for coding your invoices –

the department manager or the AP clerk?• Who SHOULD be coding your invoices – the

department manager or the AP clerk?• Are you “robbing Peter to pay Paul?



Record keeping and documentation• For patients/residents, where does record keeping

start? Before or after the admission?• Pre-admission fact gathering – CWF, insurance

prior authorization, verifying the pay source• Validation and Triple Check – why just getting it

billed is NOT enough!



Collections – A necessary evil• Sometimes, bad debt happens! How are you prepared

to deal with it?• Asking for money is hard! If we do it on the front end, it

will help avoid negative outcomes.(SS/ADM)• Even when you do everything right, you can still get

burned.• How does that happen? Pay source changes,

unexpected issues with Medicaid application?• Is your AR manager comfortable asking for the money –

up front or past due when needed?



Track performance – Everyone on the same page• First things first – have YOU really looked at your

budget? Do you know what’s in there?• Are expenses “controllable” or “non-controllable”

and do you understand the difference?• Have you communicated the need for cost

management with your team? • Do they understand their expense accounts and

labor accounts? Are they proactive in expense control?


Increase Revenue – Strategies$179.48 (2014), $177.49 (2013)

Differentiation Value leadership Cost leadership Referrals Readmissions Billing Consultant


Decrease expenses – Patient Care $88.91ppd (2014) ,$88.06ppd (2013) 56%

Nursing Wages - $53.26 (2014), $53.19ppd (2013) Nursing wages (RN, LPN, CNA) are the largest operating expense in any facility department. Labor, in general, accounts for about _____% of every dollar paid. 30% of revenue

Nursing Supplies & other – $4.08 (2014), $3.95ppd (2013)These expenses include medical supplies, OTC medications, incontinent supplies, IV supplies, patient personal items and any item/supplies required to care for or provide for a patient.

Dietary – $15.72 (2014), $15.35ppd (2013)Raw food is the second largest operating expense in a facility. The dietary department is likely the second largest department in the facility. Other expenses include labor, supplies and utensils.


Patient Care (continued)

Activities - $2.05 (2014), $2.02ppd (2013)Labor is the biggest expense, but this department can account for “unintended” waste that can go largely unnoted and uncontrolled.

Social Services - $1.79 (2014), $1.72ppd (2013)Cost in this department is primarily labor driven and determined by the wage paid and tenure of the staff. OT is a possible consideration if processes are not monitored for efficiency.


Decrease Expenses – Ancillary $20.26ppd (2014), $20.07ppd (2013) 13%

Laundry/Housekeeping - $7.55ppd (2014), $6.01ppd (2013)

Supply cost and potential for waste drive this expense. Chemicals for cleaning, laundry, floor care are expensive and easy to waste. Labor is also a consideration

Therapy Labor cost is the greatest consideration, contract or in-house. Productivity is the key to controlling this expense, generating revenue, and offsetting the cost of providing this service.


Decrease Expense – Capital $15.57ppd (2014), $15.09ppd (2013)

Capital vs. Operational expenses – What’s the difference?

A Capital Expenditure is money used to purchase, upgrade, improve, or extend the life of long-term assets. Long-term assets are typically property, infrastructure, or equipment with a useful life of more than one year. Generally, if the purchase price of an individual item is $500 or more, it will be considered a capital expenditure.

An Operating Expense is a day-to-day expense incurred in the normal course of running a business’s core operations. Examples include labor, purchasing supplies, utilities, repairs. These expenses appear on the income statement.


Decrease Expenses – Administration $35.58ppd (2014), $34.59ppd (2013) 22%

Plant Operations - $5.16 (2014), $4.96ppd (2013)Equipment maintenance, repairs and supplies are key drivers. A well-maintained physical plant and equipment saves money in the long-run. Contract services can be a underlying cause of excess expense.

Utilities - $4.81ppd (2014), $5.30ppd (2013)Well-maintained equipment is important to controlling these costs. Keeping a close watch on your utility bills can quickly identify an issue.


Decrease Expenses – Administration

Administration salaries - $8.70 (2014), $8.32ppd (2013)Salaries equal labor. Do you have the right people and are they managing time and resources effectively?

Other Admin $12.62ppd (2014), $12.70ppd (2013)Licenses, vehicle costs, telephone, other miscellaneous expenses. Know what you’re paying for! Are paying for pagers that haven’t been used in years?

Home office/Management feesThese are the cost for your consultants, support services etc. While these are usually allocated based on a pre-determined fee schedule, make sure you are getting the services you are being charged for.


Cost of Turnover $5,000 RN $3,500 Aides

Lowered productivity Overworked remaining staff Overtime Lost knowledge Training costs Interviewing costs Recruiting


Managing Turnover – Best Practices

Performance appraisals

Motivation

Leadership

Corrective actions


YOU CAN MAKE A DIFFERENCE


PPD 2016(goal) 2015(est) 2014 2013Room & Board 195.00 194.11 191.94 189.43 Ancillary 34.00 33.50 32.01 30.28 Other/Deductions (46.00) (46.93) (44.47) (42.22) Total Revenue 183.00 180.68 179.48 177.49

Patient Care 89.00 89.76 88.91 88.06 Ancillary 20.00 20.45 20.26 20.07 Capital 16.00 16.05 15.57 15.09 Admin/Other 52.00 52.97 51.98 50.99 Total Expenses 177.00 179.23 176.72 174.21

Profit 6.00 1.45 2.76 3.28

Annual Profit 166,326 40,195 76,510 90,925

Business Value 1,164,282 722,825 849,926 900,378

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BUDGETING

Budgeting

Annual PPD Expense

Monthly projected patient days


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NEXT STEPS

Next Steps

Performance Tracking

Financial Analysis

Cost vs Benefit Analysis

Budgeting


Agenda in Review

• Organizational value and growth

• Financial statement basics

• Financial statement analysis

• Communicating change

• Insights for managing revenue

• Insights for decreasing expenses

• Managing turnover


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Questions?

IRS Circular 230 Notice & Disclaimer

To ensure compliance with the requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.


© 2015 Mueller Prost. All rights reserved. Not for further distribution without the permission of Mueller Prost. This publication has been prepared for general guidance on matters ofinterest only, ,and does not constitute professional advice. You should not act upon the information contained in this publication with obtaining specific professional advice related to yourspecific situation. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extentpermitted by law, Mueller Prost does not accept or assume any liability, responsibility or duty of care for any consequences of your or anyone else acting, or refraining to act, in reliance onthe information contained in this publication or for any decision based on it.

Thank You!

Al

[email protected]

(314)480‐1264


Documents

Intro to Finance€¦ · Presentation Objectives ... April 12, 2016. Presentation Agenda Organizational value Financial statement basics Financial statement analysis Communicating