As practices weather the economic storm of COVID-19, consider forecasting the next three to six months to understand your financial position. Wisdom and insight underly the financials of your organization. This exercise will better prepare you and your staff to plan for the future.
After completing your forecast, you should be able to answer the following questions:
- Will cash flows cover the cost of expenses over the forecasted time horizon? If not, do we have sufficient cash reserves, or do we need to apply for additional financing?
- Do we have an appropriate staffing infrastructure to service patient volume through the end of this period?
First, download monthly historical data from your EHR/PM and purchase national or regional statistics from MGMA, NSCHBC, or local societies. Upload and organize the data into an Excel spreadsheet. Use the historical and acquired data for reference when developing your forecast.
If Microsoft Excel is an area of weakness, make efforts to improve this skill with each forecast. There are hundreds of free Excel tutorials online for virtually every use case. Perform a simple Google search to see for yourself. Utilizing formulas can reduce human error and ensure you accurately calculate the projections. Equations also simplify updates when forecasting for the next period.
An accurate forecast requires analyzing historical quantitative and qualitative data to understand how they might influence future results. Some inputs, such as fixed expenses (i.e., rent and EHR/PM), are easier to predict than revenue. For variable costs, such as medical supplies and staff wages, determine a normalized percentage of patient volume for each month. Analyze the seasonality of patient volume, average reimbursement rates, gross collection rates, net collection rates, and days in accounts receivable.
We also advise performing a scenario analysis for your forecast. In a scenario analysis, you develop a worst, expected, and best-case scenario. Through varying scenarios, you enhance the study and reduce the reliance on accuracy. Instead, the three scenarios offer differing situations for planning purposes. After all, the primary aim of performing these financial exercises is to utilize the output to better prepare and manage the practice.
Forecasting is beneficial for planning, but the real value resides in reviewing projections relative to actual results. Don’t become discouraged if predictions prove inaccurate. It is highly unlikely to predict every datapoint within a decimal.
Instead, set an appropriate accuracy corridor for each projection (i.e., worst vs. best-case scenario). At the end of each period, review your forecast, and develop an understanding of the reason behind the variance. As you continue to repeat this exercise, narrow your range of accuracy, and improve your prediction. Furthermore, this financial exercise will help strengthen the accuracy of your practice’s operations.
Invite key members of your staff to participate as well. You may conclude that your projections are sound. However, employees can offer valuable insight into purchasing or patient volume trends. As a secondary benefit, this invitation demonstrates you value their input.
Do you need help forecasting the financials for your practice? We’re here to help! Schedule a complimentary consultation today to get started: