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Preparing a Budget Financial Director

1. Preparing the Budget

Assume you are the financial director of a clinic that is a part of an organization named Getwell Clinics Incorporated. Your clinic?named after you?serves a suburban community with a population of about 24,000, of which 25% are expected to become patients of the clinic. Each patient is expected to average five visits per year. Assume that visits occur evenly throughout the year. The average physician's salary is $11,000 per month. The current practice is fee-for-service and includes Medicare and nonMedicare patients. The clinic has been approached by several HMOs to provide services to their enrollees, but the board of directors has decided to defer participation until year 2015.

After adjustments and allowances, average charges are $50 per visit. You believe that patient receivables are too high. You expect to improve collections, resulting in a balance of $220,000 patient receivables at the end of the year.

The flexible budget for operating costs for the clinic is as follows:

Operating Costs
Variable Expenses per Visit Fixed Expenses per Month
Nurses' salaries 0 $18,000
Administrative and technical salaries 0 $19,000
Medical supplies $6.00 0
Rent 0 $4,000
Service bureau for medical and financial records $1.00 $2,000
Other operating expenses $3.00 $6,000

Planned purchases of medical supplies are $16,000 per month. Supplies are paid in the month following purchase. Service bureau expenses are paid in the month following service. All other expenses are paid in the month of incurrence.

During year 2015, your clinic plans to purchase $80,000 worth of equipment, which will depreciate on the straight-line basis over 5 years. A $75,000 line of credit has been arranged at the bank if needed. Assume a desired minimum cash balance of $10,000. You may assume that interest on any amounts borrowed is already considered in other operating expenses.

The statement of financial position at the end of 2015 follows:

Your Clinic - December 31, 2015

Assets
Cash $20,000
Patient Receivables 240,000
Supplies 8,000
Total $268,000
Equities
Accounts Payable: Supplies $6,000
Accounts Payable: Service Bureau 4,000
Total Liabilities $10,000
Partners' Equity 258,000
Total Equities $268,000

? Propose a new service or product to be implemented. Cost will be $80,000 for equipment as described above. Write a proposal that includes the proposed budget for the next 6 years. Your proposal must

o consider the three principal benchmarks referenced on p. 105 (Ch. 13) of Accounting Fundamentals; explain which benchmarking data you anticipate being the best approach to evaluate your proposed budget and why.

P. 105 (Ch. 13) of Accounting Fundamentals;

There are three principal benchmarks. The first is the organization's history. We always want to review the ratios for the organization this year, compared to what they were in the several previous years. This enables
us to discover favorable or unfavorable trends that are developing gradually over time, as well as pointing up any numbers that have changed sharply in the space of time of just 1 year. The second type of benchmark is to compare the organization to specific competitors. If the competitors are publicly held companies, we can obtain copies of their annual reports and compare each of our ratios with each of theirs. This approach is especially valuable for helping to pinpoint why your organization is doing particularly better or worse than a specific competitor. By finding where your ratios differ, you may determine what you are doing better or worse than the competition. The third type of benchmark is industrywide comparison. Many consulting firms
and benchmarking specialists, such as Solucient, collect financial data, compute ratios, and publish the results. Not only are industry averages available, but the information is often broken down both by size of the organization and in a way that allows determination of relatively how far away from the norm you are.
For example, if your current ratio is 2, and the industry average is 2.4, is that a substantial discrepancy? Published industry data may show that 25% of the organizations in the industry have a current ratio below
1.5. In this case, we may not be overly concerned that our ratio of 2.0 is too low. We are still well above the bottom quartile. On the other hand, what if only 25% of the health care organizations have a current ratio of less than 2.1? In this case, over three quarters of the organizations have a higher current ratio than we do. This might be a cause for some concern. At the very least, we might want to investigate why our ratio is particularly low, compared to others. Table 13-2 presents one page from the SourceBook by Solucient. This page provides information about hospital profit margins over a period of 5 years. In addition, it breaks the information down by size of hospital (number of beds), urban/rural status, and other major classifications. There are five principal types of ratios that we examine in this chapter. They are (1) common size ratios; (2) liquidity ratios; (3) efficiency ratios; (4) solvency ratios; and (5) profitability ratios.

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Given the variable expenses per visit, I recommend that a new clinic service be introduce with the following features:
Service: Flu Immunization
Charge: $40 excluding cost of vaccine
Target market: 25% of the 25% expected patients out of the 24,000 population.

The target 25% number of patients for this service is based on the 25% expected patients out of the total population in the community as converting these patients into the new service would be easier since they are already a captive market.

Moreover, the fee is $10 lower than the average charge because this new service's incremental costs to the clinic are just the variable expenses totaling $10. Hence, this service will contribute $30 to the company's bottom-line.

Hence, the tables below present the projected income statement for this new service.
Year 2016 2017 2018 2019 2020 2021
Number of Patients 1,500 1,650 1,815 1,997 2,196 2,416
Charge fee per visit $40 $40 $40 $40 $40 $40
Total revenues $60,000 $66,000 $72,600 $79,860 $87,846 $96,631
Variable expenses:
Medical supplies $6 $9,000 $10,890 $11,979 $13,177 $14,495 $15,944
Service bureau 1 1,500 1,815 1,997 2,196 2,416 2,657
Other opex 3 4,500 5,445 5,990 6,588 7,247 7,972
$15,000 $18,150 $19,965 $21,962 $24,158 $26,573
Depreciation expense 16,000 16,000 16,000 16,000 16,000
Total expenses $31,000 $34,150 $35,965 $37,962 $40,158 $26,573
Net income $29,000 $31,850 $36,635 $41,899 $47,688 $70,057

Assumptions:
1. The number of patients is expected to grow by 10% each year as the popularity of the new service increases.
2. The service fee remains the same over the forecasted period.
3. Variable expenses grow by 5% each year, a slightly higher percentage than the ...

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The expert examines preparing a budget for financial directors.

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