Financial Forecasting Case Study

Financial Forecasting Case Study
Eastside Memorial Hospital
Eastside Memorial Hospital is a 210-bed,
not-for-profit, acute care hospital with a long-standing reputation for quality
service to a growing community. Eastside competes with three other hospitals in
its metropolitan statistical area (MSA)—two not-for-profit and one for-profit.
Eastside is the smallest of the four but has traditionally been ranked highest
in patient satisfaction surveys. For a complete description of the hospital,
along with its 2002–2006 financial statements, please refer to the accompanying
spreadsheet.
As the newly hired assistant administrator,
you have completed the financial and operating analyses assigned by Melissa
Randolph, the hospital’s administrator. In fact, your presentation to the board
of trustees went off so well that Melissa asked you to present the hospital’s
preliminary five-year financial plan at the next board meeting. To aid in the
planning process, she has provided the following information:
·
Given your knowledge of the
historical situation for Eastside, current trends in the healthcare industry,
and the competitive situation facing hospitals today, use your best judgment to
create the hospital’s financial plan. Make any assumptions you believe to be
necessary to create an effective plan, including assumptions about inpatient
and outpatient volume growth, capacity constraints, reimbursement patterns,
hospital staffing patterns, input cost inflation, and so on. Be sure to
completely document your assumptions in the report. The quality of your
financial plan will be judged as much (or more) on the validity of your
assumptions as on the mechanics of the forecasting process. (You have very
limited specific information about Eastside, so use your general knowledge about
trends in the hospital industry to make the forecasts.)
·
The emphasis should be on the
forecast for the coming year (2008), but you should also create rough pro forma
income statements, balance sheets, and statements of cash flows for the coming
five years, including key financial ratios. The five primary methods for
forecasting income statement items and balance sheet accounts are:
o
Percentage of sales (in which a
growth rate is applied)
o
Simple linear regression
o
Curvilinear regression
o
Multiple regression
o
Specific item forecasting
You may need to
use several of these methods in your forecast. (Hint: Spreadsheets have
regression capability.)
·
Use the financial analysis from
the case in Week 1, Assignment 4 to
aid financial forecasting in this case. Those areas which reflected poor
hospital performance should have improved, and your forecasts should reflect
anticipated operational improvements where applicable.
·
Do not get so involved in the
mechanics of the forecasting process that you forget to apply common sense to
your forecasts. Think about what has happened in the past and what is likely to
happen in the future with regard to utilization, prices, costs, and asset
requirements. If the forecast does not make sense, modify it. For example, a
mechanical application of statistical forecasting techniques might lead to a
forecast containing five years of net operating losses. Regardless of
statistical “fit,” such a forecast makes no sense because any hospital, if it
expects to survive, will have to take actions to adjust either utilization or
costs to ensure positive operating results. Thus, mechanically forecasted
values do not represent what is likely to happen in the future, even though
they might be a perfect reflection of historical trends. Also, a forecast that
is wildly optimistic probably needs to be modified because payers will react
negatively if hospital profits rise dramatically.
In closing, Melissa gives you her view of a
good financial plan: “First and foremost, the plan must comprise pro forma
financial statements, a table that summarizes the amount of finance generated
internally, and external financing requirements. Second, key financial ratios
must be calculated, and the hospital’s expected financial condition must be
assessed with special emphasis on changes from the hospital’s current
condition. Third, make sure that your pro forma financial statements are
consistent with one another. The last assistant administrator could not figure
out that some balance sheet accounts—equity (fund) capital and accumulated
depreciation—are tied to income statement items, so he made a quick exit.
Finally, be sure to make all your assumptions clear, and be prepared to answer
questions from the board concerning the impact of changes in your assumptions
on the financial plan.”