Avoid Inclement Conditions with Financial Forecasting
Wednesday, October 9, 2019 9:00 AM
From left: Lisa Marchegger, Financial Services Manager, and Nolan Umana, Senior Analyst
In many medical practices, the decision-making process starts and ends with the physician owners. Between practicing medicine and running the organization, major business decisions — such as adding a new location, partner, or ambulatory surgery center (ASC) — are sometimes not given the time and attention they deserve. Unfortunately, this lack of careful consideration may result in uninformed decisions that negatively affect the practice. The question is, how can practice owners thoughtfully vet opportunities without taking time away from their daily obligations?
Forecasting Your Finances
When making business decisions, the first instinct is often to look at financial statements. However, these are generally based on a practice’s past performance and do not indicate potential future outcomes. Meanwhile, financial pro formas can help physician owners create a forecast for the next one, three, or five years. A pro forma outlines what a practice hopes to achieve — a financial prediction, if you will — by combining known information with a hypothetical (i.e., a business opportunity) to show its possible effect on future results.
When used discerningly, pro forma forecasts can help practice owners with the scenarios outlined below.
- Better understand future business decisions, such as:
- Bringing on a new provider.
Visualizing the potential revenue and associated overhead costs of a new provider can help determine if hiring makes financial sense.
- Expanding to a new location.
Compiling the projected financing, construction, equipment purchases, staffing, and operating expense of a new location in one place allows owners to forecast the expected revenue, overhead, financial implications, and impact of the project.
- Purchasing new equipment.
While the decision to expend capital or finance a new piece of equipment can be daunting, comparing the expected cash flow the equipment could provide against its associated costs can help determine the Return on Investment (ROI).
- Navigate complex financial matters, including:
- Changes in ownership.
Visualizing important changes to ownership structure, such as the buy-out/buy-in of a partner, can help illustrate the income available for owner distribution.
- Changes to staff or provider compensation.
Negotiating an employment agreement is easier if you understand it’s impact on the bottom line at various revenue levels. Staff compensation adjustments also should be modeled in various scenarios.
- Financing support.
A detailed, thorough, and well-researched pro forma may assist in obtaining financing for your next large project or purchase.
Create a strategic action plan, so that you can:
- Project future overhead.
A pro forma can help practice staff plan and budget for things like hiring and purchasing. Additionally, projecting the impact of future increases to overhead will help practices make better decisions now.
- Stay on task.
Keep businesses looking ahead and on task by providing a sense of direction based on solid assumptions and analysis. This action forces execution of strategic planning.
- Compare apples to apples.
After a new business opportunity has been pursued, physician owners can compare what was forecasted vs. actual results to identify areas of focus.
Clear Skies Ahead
Making decisions that have significant, long-term impact to a practice can be daunting. For busy physician owners, considering all the variables of those decisions can be difficult. Whether it’s a plan to expand your practice or simply gain understanding of the strength of your cash flow, forecasting your financial future with a pro forma analysis is a strategy for better decision making. By following the pro forma process, physician owners can rest assured knowing they have forecasted for a sunny future.