Module 5: Capital Analysis Tool powered by Kaufman Hall Results
Reviewing the Results
The Capital Analysis Tool powered by Kaufman Hall generates three financial statements, the income statement, cash flow analysis, and the net present value computation. To start, you will want to review your model before showing it to your Finance department. Look for unusual results that standout as from what you expected. For example, if your revenue line is going up rapidly, does it make sense based on what’s going on in the environment? If need be, go back and check your assumptions and rerun the model.
Following are some generalities about how each of these statements is viewed by various healthcare organizations.
Income Statement: Hospitals, in general will favor the income statement over cash flow analysis. Bottom line they are focused on profitability, and can, at a glance compare results from their income statement based on previous years. The income statement will also be a key factor in obtaining finance dollars externally in the open market.
Cash Flow Statement: A Group Practice or Diagnostic Imaging Center, for example, will focus more on the cash flow statement than the income statement since they will not have previous year data to compare their results. In these entrepreneurial start-ups it would not be unusual to see negative cash flows in the early stages of the business. Cash flow analysis will tell them how much capital they will need to get the business off the ground and help them to assess how much of their capital purchases need to be financed.
NPV (Net present value): This analysis will be a key factor in determining acceptance for any capital project in any organization. In some cases, organizations with more investment opportunity than budgeted projects may simply rack and stack projects based on the rate of return calculated in this analysis. Your Finance department will focus on this analysis when making capital decisions. More information on how to present this result is given in the next section.
Presenting Results to a Financial Manager
The Financial Manager should be well versed in the concepts inherent in the Capital Analysis Tool powered by Kaufman Hall, so there should be no problems with any of the definitions. In fact, in many organizations, the Financial Manager will require that the Finance division perform the actual steps enumerated in this training.
If however, in your organization, you, the department manager, have worked through the model, then the best way to present the results to the Financial Manager is to start by showing him or her the Net Present Value results. Assuming that the NPV is greater than the hurdle rate, your job should be easier than if not. The Financial Manager will ask to see your assumptions relating first to volumes, second to reimbursement rates, and third to expenses. Be prepared to expose and defend these assumptions. If they are convincing, your project should be approved.
Performing Sensitivity Analysis
Although you have performed the financial analysis and have created a Net Present Value, bottom line, you have so far only created a single possible scenario. Since you cannot accurately predict the future, there are many possible futures that will drive different (i.e.: higher or lower) bottom lines. You need to understand that your volume assumptions have the highest probability of risk associated with them, because you do not know whether your new capital equipment will actually generate the level of assumed volume.
Therefore, it is appropriate to create alternative iterations of the model (often called sensitivity analysis) to project higher and lower volume to determine the range of NPVs that may happen in the future. The Capital Analysis Tool powered by Kaufman Hall also allows you to do sensitivity analysis with reimbursement rates, payer mix and other variable cost parameters by copying an analysis into a new one, and allowing you to change these parameters.
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The Capital Analysis Tool powered by Kaufman Hall generates three financial statements, the income statement, cash flow analysis, and the net present value computation. To start, you will want to review your model before showing it to your Finance department. Look for unusual results that standout as from what you expected. For example, if your revenue line is going up rapidly, does it make sense based on what’s going on in the environment? If need be, go back and check your assumptions and rerun the model.