FINAL ASSIGNMENT
Earlier in this course, you chose a type of business and form of ownership for your company. You’ve also come up with a mission statement, values and vision statement, and corporate goals. The final step is to create a Profit and Loss Statement (AKA, Income Statement) based on your business.
STEP 1: Review the Profit and Loss Video to learn how to create your Profit and Loss Statement.
http://repo.pmi.edu/online/Master_Documents/HCA223_Health_Care_Finance/Final_Project/P_and_L/P_and_L.html
STEP 2: Open and save the Profit and Loss Statement Template. Answer each question and scenario below using the template and figures as your guide.
1. Set up the attached Profit and Loss Statement for your business according to the Profit and Loss video.
2. After determining what your net profit is for the year, increase revenue for half of the year by 20% and raise expenses in each category by 5%.
3. Increase cost of goods by 25% and analyze how this affects your net profit.
4. Write a one page summary of your projected expense increase based on your analysis. How does this affect your staff, productivity or salaries?
5. Assume that your insured clients will now pay ½ of what they did for your product/service for 2011. How will this affect your bottom line?
Save file in Rich Text Format (.rtf).
This Assignment requires 2 files:
1. Excel Sheet (template attached)
2. Word one Page summary
SEE FOLLOWING PAGES FOR ADDITIONAL INFO
Type of Business: Pain Management Clinic
Form of Ownership: Sole Proprietorship
Mission Statement: Our goal is to offer the community, from children to adults high quality care; with warm, caring and professional services from our family-friendly staff members. We are committed to take care of patient’s needs and concerns, while ensuring the most comfortable experience possible.
The most important thing about a mission statement is defining clearly the purpose of the business, the goals, ethics and what this can offer to future patients.
OTHER INFORMATION RELATED TO THIS ASSIGNMENT
The type of organization I have chosen to develop a financial plan it’s Pain Management. This business is privately owned and will remain sole proprietorship, because the practice at the moment has only one physician. Looking to increase this business recognition it’s important to stabilize the current financial status of the practice and one of the best ways to do it, is with the simplest forms to operate the business, staying as sole proprietorship, understanding the risk that this might be, in which the owner will continue to be liable for all business debts. The current owner does have future plans of incorporating other physicians and possibly start a partnership.
This for-profit pain management organization has the desire to offer pain relief to patients with acute and chronic pain, by suggesting the best pain management tools that can help restore their current health and encourage a better way of living. The practice will be serving from young adults to older adults, who have suffered a type of injury, complication from surgery, or those who developed a condition from drug abuse or a current disease like HIV and Cancer.
My role as a financial manager will essentially be the responsibility of the health of the organization, and “to plan for, acquire and use resources to maximize the efficiency and value of the enterprise” (Gapenski, 2014). Part of my duties consists in developing strategies and plans that will help the financial goals of the business in a long term, as well as financial advice and support while handling the money of the practice. The financial manager responsibilities in the structure of this type of business, as stated by Gapenski (2014) are combined and assigned to one individual, and is often called business (practice) manager.
While this business is considered small, it can still face a few important financial challenges. The reimbursement of consultations and specific procedures performed on a patient. A constant issue between insurances and medical groups is that while the group authorizes, the insurance can still deny and won’t pay. Patient is being told their treatment will be covered, but the practice ends up absorbing the costs. Another challenge, in which the physician (owner) is liable, is with the follow up care of the patient after performing any procedure, if any of the staff members fails to accommodate the patient and offer the standard of care, the owner can be subject of legal issues.
References
Gapenski, L. (2014). Fundamentals of Healthcare Finance. Organizational Goals: Small For-Profit Business. (2-2.5) p 40.
● Break-Even Analysis Assignment
The break-even point for a business is the point at which you are not earning a profit nor incurring a loss. As financial managers, it is important to know what this point is because an increase in revenue or sales may not necessarily mean an increase in profit. You have to understand the variable and fixed cost behavior related to your business.
For this assignment,
1. Identify the variable and fixed costs associated with your selected business. Discuss how these costs are affected by changes in productivity levels. Determine what steps you could take to reduce at least two of those costs. (15 points)
Pain Management Clinic
Fixed Cost:
⦁ The cost of Fluoroscopy, another term for X-Ray Machine. This equipment allows real time imaging during procedures performed at the practice. No matter how many x-rays are taken, although this is fixed, the cost might not be the same all the time.
⦁ The rent of the office of the practice that is located inside a privately owned building.
⦁ The cost of Kenalog, a corticosteroid that is used for interventional procedures. No matter how many epidural injections the doctor performs, the cost remains about the same.
⦁ The cost of service for our eClinical electronic health records system. Regardless of how many patients we access or create the monthly service maintains around the same price.
Variable Cost:
⦁ The more patients the practice sees for pain medication appointments, the more prescriptions the doctor needs to prescribe, and more orders will be done to the printing company.
⦁ The same applies for paper, the higher the volume of patients, the higher of “office visits questionnaires” that need to be printed.
⦁ The more procedures the doctor performs the more x-ray films that will be required.
Fixed costs are usually constant every month at the clinic and do not change much with productivity levels. On the other hand the variable costs vary depending on the productivity level of the practice, for example: If more patients get scheduled for medication management appointments, and less patients are booked for interventional procedures, the visit value will decrease and vice versa. As a result the variable cost will be also affected with the higher volume of prescriptions that are given and need to have on hand, while less money is being spent on films.
In order to reduce at least two of the costs above mentioned, first of all and depending of the financial status of the company, in this case achievable, I would propose the change of locations of the practice by purchasing their own building. There are many elements that can justify the transition of the practice, like the fact that the company has increased the number of staff members by 25%, the hiring of a new physician and the lack of sufficient exam rooms. Another way to reduce costs, in this case a variable, I will propose the purchase of at least four tablets to have patients record electronically their chief complaint instead of using a printed questionnaire, which can help decrease the volume of paper used in a long term.
2. Review the Break-Even analysis tool. Using the Excel template on this website, calculate the break-even point for your chosen business. Save the document with term Break_FirstName. Save it as Excel file format (.xls or .xlsx). (10 points)
3. Explain how the break-even point can fluctuate. As the financial manager of your business, discuss why it is important to monitor the break-even point? (5 pts)
The same way the practice can change the prices for its services, also indirect and direct costs could, and as a result the break-even point will fluctuate. It is very important to know the break-even point of the practice. Going back to the previous example, what would happen if the practice schedules only office visits for medication, which has the lowest value among all the office visits. Without a balance, less revenue will start to appear in the books, and in order to be able to help patients without losing money, the schedule should have different types of visits during the day, and this can improve the practice flow and become significantly more efficient.
● Pricing Assignment
When assigning prices to end products or services, the management of that particular business needs to decide on the strategy and basis of assignment. From this there are two strategies that can be employed; the full cost pricing strategy and the marginal cost pricing strategy.
In the case of the proposed Pain Management Clinic set up, there are different services offered. For example, in an Interventional Procedure visit, the patients pay for both the doctors’ services and fluoroscopy service rendered that goes along with that visit at the facility. Using the full cost pricing strategy, the management would typically include all fixed costs and variable costs in the pricing of both services. The x-ray operation; rent; medication used for procedures costs; and the EHR system cost are all divided equally between the two services. In addition, the printing costs; paper costs; and the cost of x-ray films are also included in these calculations. In essence, the base price of either service at the practice will be the same and the management may only add a difference in the profit margin charged on each service.
If the marginal cost pricing strategy is employed to pain management clinic pricing schedule, then each service will be assigned a cost that can be directly traced back to it (Thompson, 2015). There will be no blanket cost assignment based on all costs accrued by the day to day running of the clinic. For instance, fixed costs such as rent and EHR (electronic health record systems) remain the same over time whether the practice received one patient or a hundred patients. Therefore, such fixed costs have no direct relation to the cost of the service offering. In this strategy, the company would charge the variable cost of the prescriptions and documents that are necessary to be printed in order to assist the patient, to the medical consultation price and the x-ray film charge to the x-ray services price.
Target pricing strategy would involve an assessment of the target market and the desirable price range the customers in the particular segment are willing to pay (K@W, 2003). Target costing has two ways of affecting the health center business. First it will limit the profit gain from the venture as the strategy would lead to a lower profit margin than the competitors pricing mode.
Based on the three pricing strategies presented above, the most appropriate strategy to employ would be to use the target pricing strategy. In this way, the practice can price its services based on affordability by the customer. In addition, the prices can be set for different customer groups depending on individual preference. In this way, the company does not lose customers because of inaccurate pricing and it still gets to make a reasonable profit margin from its cheapest pricing while making abnormal profits from its very high pricing scale.
Given the collection per unit of service as 250; variable cost per unit of service as 81; the total fixed cost as 38,000; and an estimated unit of service volume per month to be 1,000, the expected breakeven point in months is 0.2., in addition, the breakeven point in collection of units of service is 225, and the revenue breakeven point would be 56,213. This means that the practice would have broken even within the first week of operation. Subsequently, if the number of patients processed by the clinic increase by 1,000 units the breakeven point, in term of months, is halved to 0.1 (approximately 3 days) up to the 4,000 patient (4,497th patient to be exact). Beyond this number of patients the breakeven point is instantaneous; the company would breakeven the same day it opens. Since all the fixed costs remain the same regardless of the number of patients processed, most noticeable changes would be recorded in the variable cost section. There will be a greater charge for the office visit preparation process (printing and uptake of x-ray film)
References
Knowledge@Wharton. (2003). Wharton: University of Pennsylvania. The Hidden Danger – and Payoffs – of “Targeted Pricing”. Retrieved from http://knowledge.wharton.upenn.edu/article/the- hidden-dangers-and-payoffs-of- targeted-pricing/
Thompson, S (2015). Chron. Difference Between Full-Cost & Marginal-Cost Pricing Strategies. 1. Retrieved from http://smallbusiness.chron.com/differences-between-fullcost- marginalcost-pricing-strategies-66005.html
● Understanding Financial Statements
Notes:
Now that you have explored revenues and expenses, variable and fixed costs, cash and inventory, and other health care finance terms, it’s time to see how all this information is put together. Financial statements compile this vital business information and act as reports of the “financial health” of the organization. Understanding financial statements is important not only for the financial manager and other internal managers, but also for external stakeholders such as investors and the government. There are three primary statements: Income Statement (AKA “Profit & Loss” or “P & L” Statement), Balance Sheet, and Statement of Cash Flows.
Complete the interactive tutorial to help you understand the three basic financial statements. While accountants typically prepare these financial statements, financial managers and others need to understand the information contained within them to answer important questions and make sound financial decisions. In this tutorial, you will review the statements using a practical example, a pizza business. While this example does not represent a health care business, it is helpful in understanding the basic concepts and terminology associated with these statements.
Income Statement (Profit & Loss or P&L Statement)
Each financial statement tells a story. The Income (Profit & Loss) Statement conveys a story for a particular period in time about the business’s ability to generate a profit. It illustrates the equation, Revenues – Expenses = Net Income (Profit) or Net Loss. As you review the Income Statement, think about how it correlates to your selected health care business. What are your business’s sources of revenues and expenses that you explored earlier in this course? As the tutorial states, if you are offering a product, you will have a Cost of Goods Sold section. If you are providing a service, this section is not included. What story will your Profit & Loss statement tell?
For the final project in this course, you are asked to develop the Income (Profit & Loss) Statement. A template for the Profit & Loss Statement is provided in the instructions for the final project.
Balance Sheet
The Balance Sheet tells a story at a point in time, like a snapshot. It tells the reader about the business’s liquidity, or the ability to convert current assets into cash. It also demonstrates the equation, Assets = Liabilities + Owners’ Equity. Each financial transaction is recorded by an account (assets, liabilities, owners’ equity) and has an effect on the Balance Sheet. Whatever affects an account in the equation must have an offsetting effect on another account(s) to ensure the equation balances (hence, the name of the financial statement, “Balance” Sheet).
Think about this example: Typically, health care businesses have cash and accounts receivables as assets resulting from services rendered. Suppose a patient has received a service, such as an annual check-up, and a payment is due by the insurance company. An account receivable (asset) has just been created. If assets increase, then either another asset would have to decrease to offset the change, or liabilities or owners’ equity has to increase. For this example, owners’ equity increases due to increased revenue that is recorded when the service was rendered.
As you review the section on the Balance Sheet in the tutorial, think about the information that would be on your business’s Balance Sheet. What story will it tell those who read it? After reviewing the tutorial, you should have a better understanding the nature of accounts and what information a Balance Sheet provides.
Statement of Cash Flows
The Statement of Cash Flows shows the actual cash inflows and outflows over a defined period of time. It tells the reader how cash is generated and used in operating, financing, and investing activities. The Statement of Cash Flows is similar to a bank statement for a checking or savings account because it identifies the inflows and outflows. However, the difference is that the Statement of Cash Flows looks at inflows and outflows in three separate categories so that you can better manage how the cash is generated and used.
As you review this tutorial, think about the concepts you learned on Cash Management and how they apply to your health care business.
