Healthcare Clinic Financial Model
Dramatic shifts in the delivery of healthcare services have changed the way modern hospitals function. Nowadays, they have to develop effective strategies to survive in a competitive market. As a clinic financial modeling specialist, I know the ins-and-outs of the challenges encountered by modern businesses. In most cases, numerous strategic fallacies lead to all the problems. Though 75% of small business owners are confident in their strategic planning, 20% of them fail in the first year, 50% — in the fifth, and 70% — in the 10th year after the launch. This is why I believe that model hospital operations can help hospitals survive in competitive conditions.
BUDGET MODELING SAVES FOR-PROFIT CLINICS
Obviously, all stages of healthcare delivery differ from other service provider systems. Finance planning assists healthcare sector in long-term budgeting. In my professional practice, I go through large volumes of information and find key performance indicators for hospitals. They help me predict the outcomes of future or current transactions.
In this post, I share a link with you to my healthcare business plan template and give you access to a ready-made sample of healthcare clinic financial model excel, which you can purchase by clicking the button below or at the end of the article.
Additionally, I provide you with a video review to help you gain a complete vision of the healthcare model. However, before we begin, let’s explore why forward estimates are essential in healthcare models. Besides, we’ll focus on different model types to decide, which suits hospitals the best.
PROJECT VALUATION MODEL FOR CLINICS: IMPORTANT OR NOT?
Speaking generally, forward budgeting is crucial for all types of businesses nowadays, but there are several critical factors that make it especially important for healthcare.
The initiatives of investor-owned hospitals are on the rise, In particular, for-profit clinics represent 58% of all the U.S. community hospitals today;
Medical practice valuation saves public health service from bankruptcy. In fact, it helps clinics avoid the use of too expensive equipment;
With the help of financial projections, you can calculate overall expenses of opening a clinic. In particular, you can estimate needs for certain services, costs of procedures, salaries of personnel, and so on. Thus, funding projection is a great option for investors who want to give their money worth.
DIFFERENT BUDGET FORECASTING TECHNIQUES
Nowadays, there are many types of financial models, and the use of each depends on the expectable outcome of planning.
Leveraged buy out model is beneficial for companies that want to borrow costs for making a big investment. In public health service, this method helps investors to see how much time they need to meet acquisition costs.
Option pricing model allows businesses to calculate a potential value for a certain option at a specific time. Using this model in healthcare, we can estimate reasonable prices for certain products or services.
Sum-of-the-parts model makes a break-up analysis of the company. Applying this model to healthcare valuation, we determine the value of different healthcare services or divisions.Comparative company analysis model can compare a company with similar businesses within the same industry. As an illustration, this model allows comparing the financial performance of several healthcare institutions.
Discounted cash flow model can estimate the value of a business, predicting the sum of future cash flows.
In our case, we used the last type which was a discounted cash flow valuation model because the main purpose of our client was to understand whether her idea of a startup is profitable. You can find more information about other financial modeling types here. In this way, according to expectable outcomes of funding projection, we focused on a certain model type, defined the key expectations, and set up a range of goals to be achieved.
Let’s take a look at the specific case from my practice and explore the essentials of successful financial prospects.
CONVEYING A BUSINESS IDEA
In my day-to-day working practice, I consult the people, who need my assistance in calculating startup costs or estimating future cash flows for their current or forthcoming projects. Once I worked with a doctor, who had more than 15 years of working experience behind her career in healthcare.
One day the lady came up with an idea of establishing a specialized healthcare clinic. However, the problem was to choose the service that would not have to compete with other general clinics.
Meanwhile, having done some extensive research, the lady found out that adults with chronic diseases represent more than half of the market share. In particular, 1 in 3 adults in her town suffered from cardiovascular diseases. Besides it, about one-quarter of patients had diabetes type 2. So the doctor wanted to focus on long-term care services, particularly on wound care. This type of healthcare delivery is vitally important for people with chronic diseases. All things considered, the lady decided to focus on wound care services with the use of HBOT equipment, which is not yet known in her town. In hyperbaric oxygen therapy (HBOT), the use of pure oxygen speeds up the process of wound healing, what’s especially good for diabetics.
THE REASONS FOR REQUESTING ASSISTANCE
On the whole, the lady acquired a vision of a strong marketing strategy for her clinic launch. In particular, she has found a niche with a minimal number of competitors, clearly defined her target market, and selected a proper product, narrowing her focus to wound care and HBOT. Nevertheless, despite her first-class education and a great background in management, she did not know what, to begin with. The use of hospital business model templates made things only worse, as none of them was applicable to her individual case.
Finally, the lady requested professional assistance, and I was there to help.
SETTING UP PURPOSES AND FORMING A PLAN
At the very beginning of our cooperation, the level of economic competence my client had surprised me to the upside. Together, we set up expectations and established the main purposes of our cooperation, such as the following:
to understand, whether the business idea is profitable;
to calculate overall costs of specialized clinic launch;
to find out, whether signing on a hospital manager would be affordable;
to calculate expenses on salaries and wages of hospital workers;
to calculate expenses on equipment, suppliers, management, education, and advertising;
to estimate costs of debt and time needed to loan back;
to calculate an average number of visits within a certain area (population);
to estimate prices for each procedure;
to find the main hospital financial performance indicators;
to craft an effective strategy for business development.
SETTING UP A STAGE
Having planned everything, I started working on hospital financial dashboard, which became the cornerstone of a future model.
Before we begin creating a model, let’s consider some valuable aspects of the process. First of all, it is necessary to define the key drivers and variables to rely on.
- In our case, these variables consisted of the
- addressable market population and
- the market share,
- the number of visits per patient per year,
- treatment prices and
- overall hospital operating expenses.
We established the links between debt, potential investments, managing and operating expenses.
Finally, our model had to be responsive to changing drivers, as we wanted to test several alternatives.
For instance, we could look at clinic financial statements with or without patients growth year over year.
All things considered, I started working on the model.
HOW TO FORECAST HOSPITAL FINANCIAL PERFORMANCE?
Defining the Target Audience. As the client requested healthcare valuation for a certain population, I began with defining the target market, separately for wound care and HBOT. To do it properly, I focused on the three following aspects, such as:
● geographical location of the potential patients
● the estimated population growth
● the potential growing need for suggested services.
With this in mind, the doctor provided me with the estimated population growth and the percentage of patients eligible for wound care.
Based on it, the hospital financial model calculated the expectable patient growth for wound care services. It was a basis for the estimation of growth in the number of hyperbaric visits.
Population growth over the years with visits count per patient categories
Why?
Because these two variables were interdependent.
The more patients requested wound care services — the more started to use HBOT in treatment. In such a way, hospital valuation model in excel calculated the annual number of patients, who request wound care or HBOT, taking into account the changes in population.
Creating Pricing Strategy. As mentioned above, our client has solid working experience in healthcare, that is why she knows that certain procedures are more popular than the other. Thanks to this, she estimated the average weight for each procedure per patient visit. Additionally, she provided me with a governmentally regulated facility fee. Therefore, with the help of the estimated weight for each procedure, facility fee, and some other variables, the healthcare business valuation provided the exact price for each service to be suggested.
Hospital Financial model Price Inputs
Hospital Financial model Average visit Price Outputs and Estimated Revenue by Years
Making Revenue Assumptions. The annual revenue was estimated based on the average expected number of annual visits and the price of each procedure. In result, we received revenue assumptions, calculated separately for wound care and hyperbaric oxygen therapy.
Assumptions for Salaries and Wages. To get this part of work done, the client provided me with standard requirements for wages and salaries. Additionally, I asked the client to provide the whole list of personnel members, who would be working in her specialized team hospital. Important to realize, members of medical personnel might change over the years. Due to this, I took into account the staff changes which might happen in the next 5 years.
Another key point is the estimated salary growth and personal tax rates, which often are not taken into account. In this way, having considered the changes in professional staff, the need for salary growth, and the expenses on tax rates, hospital valuation provided accurately calculated salaries for each of the following 5 years.
- Average Staff Numbers Count by Years
- Staff First Year Annual Base and Annual Salary Growth Rate by Years
- Personal Tax Rate By Years
Calculating Overall Expenses. The first thing to remember, the capital expenses of launching a startup are the most significant. Due to this, we included a depreciation schedule into our model.
As the client wanted to see the big picture of the future expenses, hospital valuation statements included detailed information on annual expenses. In particular, this information consisted of expenditures on education, equipment, suppliers, advertising, management, and medical director fee. In result, the client saw the overall annual expenses on wound care, HBOT, and hospital management.
All the results were displayed on hospital financial dashboard. In this way, the model provided financial statements summary for each year of action period. Now let’s summarize the main privileges of using the proposed model.
OUTPUTS OF THE HOSPITAL FINANCIAL MODEL
Dashboard
Available at the front working datasheet (Dashboard) of the excel model and ready for instant correction by the model user.
Another batch of input indicators available at the Dashboard comprised of core financials:
- debt and equity amounts;
- cost of debt;
- a share of net profits distributed for dividends;
- and core revenue/expense positions.
Needless to say, there are a variety of charts and graphs available for visual presentation purposes. Here you can see the dashboard.
Valuation
On the Valuation tab, the net present value (NPV) of future cash flows is calculated for investment purposes. In addition, here in this section, the discount factor (WACC) is calculated. Once we had agreed with the client, we made the business valuation using this technique. Besides, the hospital valuation model provides several other options for business evaluation.
Capital
The Capital datasheet showed a straightforward view on interest charged over the period and the debt outstanding, as well as the calculation of dividends for payouts.
Financials Summary
There are three possible types of financial reports present at the end of the hospital financial model and the model can create separate datasheets for each, as they are for each financial year:
Forecasted Financial and Operational KPIs
Finally, a powerful excel chart tool helps in providing representative deliverables in Revenues and Expenses as well.
BENEFITS OF USING BUDGET FORECASTING IN HEALTHCARE
First and foremost, we did not hard-code any assumptions. It is very helpful both for the client and financial modeler, as all the variables could be edited directly on the dashboard or at the expense/wages sections. Thanks to it, we could test different alternatives and make any edits literally on the fly.
Besides, the management fee was switchable so the end user of the model could see the revenue and expenses both with and without the expenditures on management.
Besides it, the action period of budget modeling was editable, just like the currency.
Last but not least, the clinic valuation model considered the cost and the period of debt to estimate the time needed to meet acquisition costs. In result, the user received maximally accurate financial statements summary. Thus, our hospital financial metrics was flexible and editable, which provided the client with great user experience and confidence in the profitability of her business idea.
Do you want to purchase a unified version of the clinic financial model?
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Also, don’t forget to watch the video review of hospital financial model to gain a better vision of the main building blocks of budget forecasting. We appreciate your interest and opinion.
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