For some, the concept of strategic planning might conjure up images of board rooms, executives, complex graphs, and detailed reports. While this picture of strategic planning may hold true in the world of big business and finance, it certainly doesn't apply to most small businesses, and it can look much different for physical therapists in private practice.
In reality, strategic planning is actually a lot simpler than it sounds, and a lot more important than one might think. There are myriad ways to tackle a strategic plan, and in this article we'll examine the part of the strategic plan that is often most intimidating – the numbers.
The Strategic Plan
At its essence, strategic planning is simply the process of looking at how a private practice fits within its environment, and how it can best position itself for success. Private practices do not exist within a vacuum, and it stands to reason that elements both internal (operations, performance) and external (economic conditions, competition) to the practice must be considered when charting a way forward.
Strategic planning usually begins with an analysis and discussion of the more subjective areas of a practice, considering such areas as mission, vision, clinical specialty, referral sources, and competition. Approaching these areas in a logical and sequential manner is critical to the success of a strategic plan, however these areas must also articulate with objective data such as "hard" financial numbers in order to complete a sound strategic plan.
As we will discuss below, working with numbers does not have to be difficult, and taking a simplified and methodical approach often yields the best results.
Financial Projections
Financial projections are to private practice what the plan of care is to a patient. Without a plan of care, we would not know what targets our patients are aiming for, and we would have very little to guide us along the way.
The same is true in private practice, and for this reason it is imperative that financial projections be used as part of the strategic planning process. Below I've highlighted three concepts that make the numbers as simple as they are powerful within the strategic plan: (1) time, (2) content, and (3) calculations.
Time. For purposes of financial projections and strategic planning it is recommended to plan for one, three, and five year time frames. This provides a practice with planning that strikes a good mix between actionable tactics (year one) and long range vision (year five). One year financial projections should be as exacting as possible, with the objective of deviating from the financial targets by no more than a few percentage points. Five year projections on the other hand, are rarely exact and are intended to provide strategic direction and financial understanding as the business moves forward. Three year projections are a balance between tactics and vision, and should yield relative accuracy while maintaining focus on future growth of the practice.
Content. When addressing one, three, and five year projections, place a focus on four areas in order to create a comprehensive financial plan: Volume, revenue, expenses, and cash.
- Volume. Volumes are the driver of most revenue, expenses, and cash, and thus should be considered first. Create your volume projections by projecting the number of new patients each month and multiplying by your average number of visits per new patient. Refined projections may also examine volume by facility, patient segment, or service type.
- Revenue. Revenue should be projected by multiplying projected volume by an average collection (payment) amount per patient. Good revenue projections will break down revenue into gross charges, insurance adjustments, refunds, and net collections. Many will also evaluate revenue separately for each facility, and by initial evaluation versus return visit.
- Expenses. Expense projections should look at expense categories that are functional for the practice. Most practices can benefit from looking at expenses in the following categories: Staff expenses, variable expenses (non-staff), and fixed expenses. Because fixed expenses generally don't change with volume, it is beneficial to evaluate variable expenses separate from fixed so that an accurate understanding of projected costs can be calculated.
- Cash. Often overlooked, cash moves in and out of a private practice differently than revenue and expenses. For purposes of projecting cash flow, it is a good rule of thumb to "lag" cash inflow by 30-60 days from the time the revenue is generated, also accounting for any refunds anticipated based on historical trends.
Calculations. Once financial projections are complete it is important to establish financial and operational targets based on the calculation of a few important metrics and ratios. Evaluating metrics and ratios provides insight into the anticipated efficiency and profitability of a practice based on the financial projections. Once established, these same metrics and ratios should be evaluated regularly against projections to ensure the practice is trending according to the strategic plan. The seven key metrics and ratios below are some of the most important and easiest to calculate:
• Average Charges/Visit: Total charges divided by total visits.• Average Collections/Visit: Total collections divided by total visits.
• Collection %: Total collections divided by total charges.
• Profit %: Net income (total collections minus total expenses) divided by total collections.
• Collections/New Patient: Total collections divided by total new patients.
• Collections/Visit: Total collections divided by total visits.
• Productivity %: Total hours billed (by treating staff) divided by total hours worked (by treating staff).
It is important to understand that the true benefit of strategic planning is not found in a set of financial projections or in a few key metrics. The benefit is in the process undertaken to analyze, conceptualize, and communicate a strategy for navigating a practice within a given market environment. By keeping the plan simple, committing to regular monitoring, and engaging stakeholders in the process, strategic planning will be recognized as one of the most valuable exercises that a private practice owner can perform.
Victor Nwigwe, Executive Manager
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