Magazine article Behavioral Healthcare Executive

Designing a Financial Blueprint: Financial Staff's Input Is Critical When Building or Renovating a Facility

Magazine article Behavioral Healthcare Executive

Designing a Financial Blueprint: Financial Staff's Input Is Critical When Building or Renovating a Facility

Article excerpt

In Extreme Makeover: Home Edition, a well-coifed, nattily dressed crew of designers, carpenters, plumbers, and electricians remakes a stunned family's home in a week--but this isn't "reality" TV. Major building projects generally require a substantial time and resource commitment in the planning stages. While the design and engineering work should be left to professionals, your financial staff has an important role in the planning process. Based upon many years of experience in providing capital to nonprofit organizations undertaking major projects, it has become quite obvious that the financial leadership's early involvement in the planning process is essential for a successful project.

In the early stages, financial staffs input is essential to determine the project's appropriate, and affordable, scope and cost. A clear delineation of available financial resources provides operational planners, architects, and engineers with definitive parameters for planning and designing a workable concept, thereby saving time and money. Setting financial parameters early also allows executives to better manage the expectations of clients, flinders, board members, and employees.

Developing a financial blueprint for a capital project, whether a new building, a major renovation, or even a new information system, involves numerous internal and external variables. Developing and refining a financial model can be tedious and time consuming, but they're worth the effort.

A useful model will take into account the project's impact on the organization's income statement, balance sheet, and cash-flow statement, described in more detail below. Once the modeling process has been developed, the financial projections can be evaluated by calculating standard financial ratios and comparing the results to industry targets (table). This composition process will help management determine both the project's financial viability and the likelihood that the necessary amount of outside capital can be raised to finance the project.

 
TABLE. Key financial ratios for nonprofit behavioral healthcare 
organizations 
 
Ratio                       Definition             Target   Goal * = 
                                                   ratios  higher value 
                                                    (1)        is 
                                                           preferable; 
                                                            * = lower 
                                                            value is 
                                                            preferable 
 
Days cash on    (Cash and Equipments-Short-Term     30    higher value 
hand            Debt) / (Total Operating                  is 
                Expenses-Depreciation-                    preferable 
                Amortization) / 365) 
 
Days in         (Accounts Receivable) / (Total      60     lower value 
accounts        Operating Revenues / 365)                  is 
receivable                                                 preferable 
 
Cushion ratio   (Cash and Equivalents)/Maximum      1.0    higher value 
                Annual Debt Service (2)                    is 
                                                           preferable 
 
Current ratio   Current Assets / Current            1.25   higher value 
                Liabilities                                is 
                                                           preferable 
 
Operating       (Operating Revenue-Operating        2. … 
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