December 27, 2006
Of the various benefits that organizations can reap from strategic planning, financial benefits are the most obvious, according to Alan M. Zuckerman, president, Health Strategies & Solutions, Inc., in an article in the winter 2007 issue of HFMA's Strategic Financial Planning newsletter. Yet organizations have had mixed results in achieving this goal.
The following excerpt from Zuckerman's article identifies four general areas of financial improvement that can and should be achieved through strategic planning.
Operating Margin
Few, if any, healthcare organizations have such a high operating margin that they can ignore the need to maintain or increase it. For many organizations today, increasing the operating margin is the primary goal of strategic planning. Unfortunately, too often plans are developed to "meet community needs" or satisfy internal constituents without appropriate regard for the impact on operating margin. As a result, and consistent with the results of the literature on strategic planning, plans are just as likely to decrease operating margin as they are to increase it.
Nonoperating Income
Nonoperating income has not been a high-priority topic for many healthcare organizations until fairly recently. The bull market of the 1990s and the bear market of the early 21st century, however, raised the profile of this issue considerably. In addition to sound investment management, an increasing number of healthcare organizations have targeted philanthropy as a high-priority strategy. Such organizations have developed sophisticated, comprehensive fund-raising programs and generated significant nonoperating income for use in capital projects, as seed money for clinical program investment, and to build endowments. A small number of organizations have developed large-scale clinical research enterprises, consulting practices, and other nonpatient care ventures to tap into nonoperating income sources. However, the lessons of the 1980s suggest that diversification away from the core healthcare business can be disastrous and should be approached cautiously.
Another typical reason for commencing strategic planning is to help structure capital-intensive facilities development. Strategic planning is commonly used outside health care for the purpose of making difficult choices among alternative capital and operating investment decisions. A small but growing number of healthcare organizations use the strategic planning process in a similar manner, which results in a prioritization of potential capital projects according to ROI, both financial and nonfinancial. Unfortunately, even today, strategic plans lead to capital consumption without appropriate regard for the downstream financial impact.
Balance Sheet
Only rarely, despite the increasingly difficult financial climate in health care, is improvement of the balance sheet stated as a strategic planning goal. And it is easy to understand that the balance sheet can often deteriorate as a result of strategic planning. Nevertheless, few organizations today can afford to see their balance sheets suffer, even if important projects are carried out as a result of strategic planning. Balance sheet management has not been a priority in the planning process or among nonfinancially oriented staff and trustees in healthcare organizations, but it needs to be much more of a concern in the future.
SOURCE: Alan Zuckerman, The Financial Benefits of Strategic Planning, Strategic Financial Planning, Winter 2007.
Additional Resources:
Healthcare Financial Management (hfm) articles (on-line access available to HFMA members only). Not a member? Join now!
Financing the Future II Report 3: Essentials of Integrated Strategic Financial Planning and Capital Allocation
Education:
If you have questions or comments about HFMA Wants You to Know," contact editor Maxine Harrison.
HFMA Wants You to Know ISSN: 1540-0697. Volume V, Issue 27. Copyright 2006, Healthcare Financial Management Association. All rights reserved.