The Financial Management of Health Facility - Research Paper Example

The Financial Management of Health Facility Abstract The financial management of any health facility cannot be relegated to the background as a factor that does not count to the collective success of the facility. This is because as much as the primary goal of health care facilities is to provide healthcare, this goal is better achieved when the facility meets its financial needs and requirement. The research paper therefore focuses on pragmatic ways of bringing about financial stability in the organization. First, the key factors to consider when making pricing and service decision are considered to include the cost of production, profit mark-up and external factors including prices of competitors. Once the right prices and services are rendered, the facility is sure to have a very firm basis for financial performance. Again, there is consideration on the actual financial planning process, where it is said that there are as many as six components in the financial planning process. Each of these components relates to the other to ensure that a firm financial basis is built for the facility. Finally, focus is given to various investment policies that the health facility can involve its self so as to ensure that it keeps an appropriate time value series and is able to overcome all major financial risks. Introduction It is common knowledge that the major business associated with health facilities such as the selected facility is the provision of quality healthcare to patients. However, the researcher is of the opinion that in order for this core objective of the health facility to be achieved, there are some key structures that need to be put in place in order t ensure that this key objective is achieved. One of the key structures is the financial structuring of the facility. As a private health facility that receives no financial assistance from central government, it is expected that there are a number of measures that will be put in place to ensure that the financial requirements needed to successfully run the facility are met. To this end, this research paper is dedicated to looking at some of the key financial structures that need to be instituted for the progressive running of the company. The first of these shall be on the factors to consider in making pricing and service decisions so that the prices issued by the facility will not in any way be a disadvantage towards the competitive advantage it wants to build. The specific financial planning processes that need to be followed by the facility and future investments that will bring the most forms of financial returns shall also be outlined in the paper. Factors to consider in making pricing and service decisions Literature identifies two major factors that need to be taken into account when making any pricing and service planning as in the case of the selected organization, which is a healthy facility. These factors are internal and external price and service determination factors (Tomecek, 2003). Generally, the internal factors are those factors that need to be considered in relation to the expenses that are incurred as part of the in-house planning and services that are rendered to patients. In the case of the identified health facility where the researcher has worked with for some time now, the very first internal factor that needs to be considered is the issue of cost of production. As a matter of fact, the health facility incurs so much cost in its bid to live up to its mission and vision statement of giving first class health service to patients at first hand supply. Some of the cost of production inculcates into the salaries and remuneration of staff, the outsourcing of drugs and medicine, the payment of bills and rents, the cost of infrastructure, cost of research works that takes place within the facility, cost of machinery and equipment, and the cost of transportation and accommodation. Each of these costs needs to be incurred by the facility before effective healthcare delivery can take place. As much as some of these costs are fixed and others are varying, it is important to factor these in the general pricing and service decisions made. The next internal factor that ought to be considered is the issue of profit mark-up. Profit mark-up has been explained to be the ratio or percentage of profit that the facility plans to make within a fixed period, in proportion to the total cost of doing business (Swift, 2005). In plan terms, an example can be given using the start of year capital of the facility and the end of year profit that the facility wants to make. If the facility spends $100,000 as capital for the year and plans on making $125,000 within the same period that the $100,000 was spent, then the hospital must be ready factor the extra $25,000 as cost that must go to the customer, who in this case is the patient. In such a situation, the quantum of profit, called the profit mark-up needs to be considered in the pricing and service so that the facility will fix prices in such a way that meets the level of profit it has projected. In terms of service, high quality and specialized service has been associated with high pricing but less patronage, whiles general service has been associated with low pricing but bounty patronage. In effect, the facility must consider which of the two it wants to use in achieve its profit mark-up. There also exist external factors in the consideration of pricing and service decisions. Most often than not, these external factors are pricing and service consideration that needs to be made in relation to market determinants (Swift, 2005). In other words, the facility its self does not have absolute control over these determinants but the larger market, of which the facility falls under. As a private health facility for instance, it is important that the management in the determination of prices consider the competitive advantage and marketing mix being used by other public and private health facilities. Because pricing has been used as both a competitive advantage and is part of the marketing mix, it is always necessary for the facility to know its competitor prices before deciding on prices to use for its self. This is especially useful as research has showed that in the midst of turbulent economic times, most patients choose low cost health facilities to expensive facilities. Apart from prices of competitors, the facility may also want to consider the availability of substitute services available to patients. In the external environment, there is the likelihood that patients can have access to services rendered by other organizations and facilities that are not necessarily hospitals. These may include herbal clinics, spiritualists and other substitute services. The hospital may want to consider if it would have to make its prices so moderate that the need of substitute services will not be an option or if it would also render some of these substitute services as mainstream service. Overall financial planning process Planning is an important aspect of the health facility’s growth and development because it determines how the facility wants to approach its strategic goals and objectives, especially when it comes to financial planning. Clearly, the kind of financial planning done by the facility determines the input and output expectations of the facility (Tomecek, 2003). As part of the overall planning process of the facility therefore, there are six (6) major steps and components involved in its financial plan. The first of these components is the determination of the facility’s current financial situation. At this stage of the planning, the facility goes back to about five years to review its annual financial statements to determine the level of growth or retardation that is being recorded. This step is very important as there is a saying that if you do not know where you are coming from, you cannot know where you are going. Based on the current financial position of the facility therefore, further actions and deliberations are made according to the present positioning of the company. This type of planning is normally done in conjunction with all departmental heads, whether or not they are directly involved in the financial regulation of the facility. This is because when these heads know the trend of growth of their departments, they are able to have better monitoring for future financial seasons. The second step or component is the development of financial goals. This component is also very important if not the most important. This is because the financial goals set by the facility goes a long way to suggest to the facility, the outcomes it wants to achieve and how it can achieve these outcomes. But indeed, these goals will best be set only and only if the first step has successfully been executed to the latter. This is because whenever an organization knows its current financial stand, it is but in a better position to deciding for its self the quantum of progress it needs to add to what has been achieved already. Setting financial goals have been identified to be very useful in differentiating organizational needs from wants (Welman and Kruger, 2004). This is because financial goals actually make the company appreciate the key inputs that count in the overall growth of the facility and those that may not be necessarily useful. A well planned financial goal should therefore tell the outsider the kind of resources needed by the health facility to achieve overall strategic growth. Above all, the financial goals will set the pace for the kind of investment the company will need to undertake in the short to long term basis. The third step has to do with the identification of alternative courses of action. Generally, the course of action to be undertaken by the organization is a series of action driven modules that the facility takes in order to bring about the achievement of its goals (Welman and Kruger, 2004). However, as an economic principle, it is wrong to put all of one’s eggs in one basket, and so it is always important to have more than one module of action that a person wants to take to achieve goals. This is where plan Bs or alternative course of action comes in. From previous scenarios, the facility goes about its course of action in a number of ways. First, it seeks to continue the same course of action for as long as it can produce results. Secondly, it expands on the existing course of action or situation. Thirdly, it changes the existing situation and takes a new course of action. In the fourth step or consideration of the overall financial planning, the facility evaluates its alternatives. Indeed, this is directly linked to the third step of identifying alternative course of action but different from it in a number of ways. The difference is that in the fourth step, there is a conscious effort to critic each possible alternative so as to settle on a selected few that will possibly be considered in urgent financial situations. For example, and by experience, the rapid increment of cost of service has been the commonly used alternative course of action for increasing revenue generation. The fifth step deals with a dual process of creation and implementation of financial action plan. This means that there is the development of an action plan at this stage. In plan terms, the development of a financial action plan explains the identification of ways of achieving the financial goals that have been set. There should therefore be realistic activities and tasks assigned to each of the goals so as to ensure that goals can be materialized (Evensky, 1997). As a strategy within the current health facility, the development of the action plans is undertaken on a gradual scale whereby short term goals are first given attention before medium term goals, and then long term goals. The final step or component of the overall planning process has to do with reevaluation and revision of plan. This is also a dual process but has two different interpretations. As far as reevaluation is concerned, it is a means of undertaking a retrospective analysis of what has been done so far so that based on flash points that are identified; revision will be made (Elgar, 2003). Reevaluation therefore ends at the point where identification of weaknesses ends. Revision on the other hand is the implementation of changes to the existing plan. How time value analysis will help in making sound management decisions Time value analysis is very necessary for the financial managers of the health facility if the indeed want to make prudent financial management decisions. This is because time value analysis will set the tone for the managers to understanding the value of money that comes to the facility in the present while and the future while (Booms and Bitner, 1981). In most instances of financial planning and management, managers make the mistake of seeing the value of money to be the same from the time it is acquired to the time it will be used. However, through time value analysis of the money that comes to the facility, managers will be offered the opportunity of figuring out the impact of interest and inflation on the money. To this end, when making projected financial decisions, issues such as devaluation will be considered. Specifically, in the fixing of prices for the year, the management will take into consideration the fact that prices of drugs will go up by the end of the year and so in planning for prices, it will be important to use projected price quotes for drugs instead of using present price quotes. Subsequently, the general management of the facility will be affected in a positive way because managers will not be in short supply of money to purchase drugs for patients when the year ends. Recommended major investment for the organization With the current trend of the bond market whereby the use of the secondary bond holder system permits that issuers of bond transfer the ownership of their bonds to new owners after a time when profits have been earned or proceed begin to decline, there is every indication that when used as an investment, bond will produce NPV > 0 (Welman and Kruger, 2004). Meanwhile in using net present value, when NPV > 0, it is an indication that the investment will add value and thus the project is worth progressing with. For the health facility in question therefore, it is strongly recommended that the financial managers invest in the bond market so as to break even in the long run. The use of bond can also be argued for as a prudent investment option because the rates on the bond purchase for the bond holders is likely to move in consonance with market interest rate and inflation rates. Subsequently, the bond investment will rightly cater for the time value of money because returns on income will not be static and devoid of growth but rather will be moving in consonance with the value of money at every point in time. Ways of addressing financial risk and required returns The most effective counteractive response to any financial risk that arises in the conduct of all financial management such as the one that the identified organization faces is the use of financial risk management (Evensky, 1997). This is because unlike what financial risk seeks to do, which is to reduce the level of guarantee associated with making financial gains, financial risk management ensures the creation of economic value in organizations such as the health facility in question. Financial risk management however comes with the combined use of financial instrument to manage the level of exposure of risk that the facility would have otherwise face. There could generally be two forms of financial instruments that can be used by the health facility namely cash instrument and derivative instrument. Based on the current financial stand of the facility and the nature of service it renders, it is recommended that derivative instrument rather than cash instrument be used. This is because with the derivative instrument, value will be derived from several sources including asset, index and interest rate of the proposed investment rather than on the direct cash that will be coming to the facility alone (Welman and Kruger, 2004). Conclusion It has been established that the identified health facility needs to depend on as many of its departments as possible if it really wants to succeed: and among the departments, the financial department is very crucial. As far as the financial structures of the organization is concerned, the research conducted can be concluded that even though there have been a lot of efforts put in place by the facility already, there still remains a number of strategies that need to be incorporated to bring about real growth and development. For instance as far as financial planning process is concerned, it is expected that the financial managers will embrace the inculcation of external expertise in the form of administrative financial organizations, whose major line of study is finances. This way, the financial planning undertake by the facility can easily be evaluated for its viability, ahead of implementation. REFERENCE LIST Booms, B. and Bitner, M. (1981) Marketing of Services. Chicago: American Marketing Association Elgar, J. (2003) Personal Financial Planning as Personal Risk Managament. Journal of Financial Services Management, (58)1, 38. Evensky, H. (1997) Wealth Management. Chicago: Irvin/ McGraw-Hill Swift, M. (2005) These essential management tools help you communicate your value and attract new clients. Financial Planning, Oct 1 81 – 84. Tomecek, C. (2003) Integrated Financial Services: The New Client Preference Model. National Underwriter, 107(12) 11. Welman, J. C. and Kruger, S. J. (2004) Research Methodology for the Business and Administration Sciences. 2nd Edition. Southern Africa: Oxford University Press. Read More