Introduction
As key capital decision makers within your institution, we know that you want to make the most knowledgeable decisions when it comes to advancing or enhancing technology within your department. You probably spend many hours every year planning and presenting your capital budgets to Financial Management within your institution in order to obtain needed capital for various projects. Economic justification of your proposed project is key to selling your needs to your Finance Committee.
Have you ever received capital money for a project, yet the project did not deliver the department revenue you had anticipated? Have you ever had a capital request turned down when you felt it was economically justified? Did you ever feel you were not speaking the Financial Manager’s language? To become more proficient at understanding all the implications facing a capital decision, and positioning that decision in a way that your Financial Management can understand, we would like to take you through a self-tutorial of the Kaufman Hall Project Analysis model. This self-tutorial will show how capital decisions are made and explain how best to use this model in analyzing and presenting capital proposals to Financial Managers.
Capital Decisions as Part of the Strategic Financial Plan
Before we discuss your capital project process and how it flows up into the financial organization, let’s understand how capital decisions fit into overall strategic initiatives of an institution.
To begin, your organization’s strategic plan is a statement of missions and/or goals that provides guidance by which the organization will commit resources during a planning period. Typically, the CEO is responsible for establishing the strategic plan. The purpose of the strategic plan is as follows:
Identify key future issues and priorities.
Allow managers an opportunity to understand and contribute to the organization’s direction.
Identify resource needs and guidelines on how they can be allocated.
Assure that the strategic plan supports board policy.
The strategic financial plan (SFP), sometimes called a long range financial plan (LRFP) is the tactical plan by which your organization will meet its mission and/or goals. The SFP is usually a 3-5 year plan, required at most institutions for major equipment purchases. The plan is reviewed and updated annually. Both the CEO and CFO, along with their management teams, typically participate in financial planning. The financial plan supports the strategic plan by answering seven critical questions;
What are the organization's strategic capital requirements?
How much cash should the organization have on hand?
How much debt can the organization afford?
What short-term and long-term profitability targets are necessary to resolve any shortfalls?
What level of operating change is required to meet the profitability targets?
Where will the capital be obtained in the short- and long-term?
What transactions are required to obtain necessary capital?
The three major components of a SFP are;
Long range financial forecast assumptions( Strategic vision, Demographics/volume, Technology, Inflation, Payment/pricing, Cost of capital, Ratios)
Capital expenditure plan (hard-dollar/projects and technology and soft-dollar/investments in physician networks and other integration initiatives)
Capital financing plan (financial projections, financial goals, debt capacity, cash requirements and profitability calculations)
Your capital proposal, if approved, will roll up into the capital expenditure plan for the overall institution. To ensure that your proposal meets the strategic plan of your organization, it is important that the forecast assumptions you use in your capital analysis reflect your organization’s view of current market trends.
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