5 Steps to Financial Forecasting

April 2, 2008

Welcome to this issue of HFMA Wants You to Know, where you will find business solutions for caring organizations.

When forecasting a healthcare organization’s financial performance, simple average calculations or untested business targets that provide general direction aren’t enough, write Doug Stark, David Mould, and Alec Schweikert of MedeFinance in the April issue of hfm magazine. Yet forecasting is not an idea that should be dismissed out of fear of complex spreadsheets and mystical practices of statisticians and PhDs. The authors recommend five steps in successful forecasting.

Step 1: Establish the business need. Healthcare financial managers need to clearly understand how their forecast will influence business planning and decisions within their organization. To establish the business need, these key questions should be answered: What decisions will the forecast influence? Who are the key stakeholders? What metrics are needed and at what level of detail? How far forward should the forecast project in terms of years, months, weeks, or days? How will accuracy be measured, and what is the acceptable level? And what is the impact of under- and overcasting?

Step 2: Acquire data. For each business driver and influencing factor, the typical forecasting effort should use at least two years, and ideally up to five years, of historical data. When forecasting efforts have short time horizons in small time periods, fewer data can be used. To collect the most accurate and robust data sets, all available data sources, such as multiple healthcare information systems, spreadsheets, small departmental databases, and/or an enterprise data warehouse, should be used. By sourcing from multiple areas, differences in organizational behavior can be balanced out to yield the best data set.

Step 3: Build the model. Once the business needs, drivers, and influencing factors have been established with the associated historical data, a decision needs to be made on the type of forecasting model to use. The forecasting model is the technique or algorithm that determines the projections based on identified business drivers, influencing factors, and business constraints. There are three major categories of forecasting models: cause-and-effect, time series, and judgment. It may be necessary to consult with business and technical experts for advice when selecting the best model for a given situation.

Step 4. Evaluate the results. Once the model has been built and executed, the resulting forecast accuracy should be evaluated using the most recent time period. Overall model accuracy should be measured using statistical functions.

Step 5: Apply the forecast. Once all the work has been done to create a high-quality forecast, it should be deployed to the stakeholders and end users in a manner tailored to their use. The forecast should ideally be made accessible to all appropriate business areas in reports and analyses packaged to unique end-user perspectives.

You can read the complete article, “5 Steps to Creating a Forecast,” in the April issue of hfm magazine.

When your financial planning calls for demand forecasts, a critical element is ensuring that the assumptions reflect realistic information about the organization’s market, including use rates, market share, and service area demographic and competitive characteristics. You can find a useful approach to ensuring your assumptions are realistic in “Are Your Demand Projections Grounded in Market Realities?” by Robert York and Jane Benjamin of Kaufman, Hall & Associates, Inc., in the Winter issue of HFMA’s Strategic Financial Planning. To read the article, click on “view sample issue” and go to page 6. And don’t forget to subscribe to this valuable publication.

You can also see an example of financial forecasting in action from “Major Project Financial Planning: Hershey Medical Center Case Study,” a Tuesday session at HFMA’s ANI: The Healthcare Finance Conference, June 23-26 in Las Vegas.

Finally, anyone involved in healthcare financial planning is focused on the meltdown in the auction-rate securities market, which tax-exempt hospitals and health systems have used extensively for variable-rate debt during the last decade. Healthcare organizations are now looking at different means to restructure and refinance their debt. You can get answers to how to move through this turbulent credit market from the April 30 audio webcast “The Current Credit Crisis: What’s Happened, How Is It Impacting Your Hospital, and What Can You Be Doing to Respond?”  The webcast will include time for questions and answers with one of the top experts on the capital markets.

"HFMA Wants You to Know"  ISSN: 1540-0697. Volume VII, Issue 7. Copyright 2008, Healthcare Financial Management Association. All rights reserved. April 2, 2008.