Successful planning involves more than updating the budget once a year.
Long before the Doppler radar came into play for weather prediction, meteorologists were using charts and graphs to cross- tabulate what the weather might be. Not surprisingly, sometimes the forecasts called for sunshine and there was rain. The act of financial forecasting has been the same for many hospital CFOs over the past few decades—an exercise in spreadsheet manipulation and outright guessing that didn't always provide the helpful guidance a hospital was looking for to make strategic steps forward.
For some financial leaders, the days of forecasting guesswork are over, and their forecasts are becoming an essential tool that helps drive the five-year strategic plan of the facility. Those financial leaders who have learned to blend a heady dose of research with new predictive technology are finding their financial forecasts can now provide the proverbial umbrella to keep them dry when the financial rain starts falling.
Ted Miller, CFO and vice president of finance at Floyd Memorial Hospital in New Albany, IN, used strategic financial forecasting when he joined the hospital in mid-2007. Prior to his arrival, the 215-staffed-bed hospital, which serves a seven-county area, was using one-year forecasts based on the current financials. The forecast didn't go beyond the 12 months of the operating budget and the process didn't include all the key members of the facility. In essence, the forecast was more of a snapshot of what was going on at the hospital at the moment, than what the facility could expect in the coming years.
Fast-forward three years and Miller and the hospital administration have embraced a new approach to financial forecasting. The process of gathering the information now takes several months and involves key members of all departments offering their insights on future trends and objectives as laid out in their five-year plan. It includes a look at areas such as patient volumes, changes in pay rates, and expenses; and whereas in the past once the forecast was completed it was done for the year, now it is reviewed midyear to see how close the projections are to reality.
"This is a robust and resource intensive process, but it really gives people a good sense of what the drivers are for financial performance. Now, when it comes time to do the annual budget the management team is much more educated about how the budget process may be affected by other factors," Miller explains.
However, financial forecasts are more than just a genie trapped in a bottle; if done correctly they can help facilities see opportunities they may be missing. For instance, Miller says the hospital used its plan to identify cost-saving opportunities in labor and supply budgets. When officials started pulling current and projected numbers, they saw an opportunity to use the forecast as a type of benchmark to help them look for ways to bring these costs down. Floyd brought in VHA, Inc., a network of not-for-profit hospitals that work together to improve their clinical and economic performance, to do a global spend analysis based on its financial forecast, and as a result the hospital was able to successfully reduce its $40 million supply expenses by $4 million in two years.
"That's an outcome of forecasting," Miller says. "When you're looking at how you're going to do in the future on a macro level you can determine where you can do better and drive that performance improvement."
Using the financial forecast as an active tool, rather than a passive one, is the approach that Marc Cadieux, director of financial services at Children's Hospital of Wisconsin in Milwaukee knows well. Cadieux joined the Children's Hospital four years ago after leaving a career in public accounting. Prior to his arrival, the system was using past financial statements to drive business decisions.
After Cadieux arrived, the hospital began basing its forecasts off of the five-year strategy and using a financial forecast model that includes predictive technologies—Enuff software by Kaufman Hall—which allows Children's to run various best- and worst-case scenarios and risk analyses of upcoming strategies.
"We are an AA-rated hospital and it's our strategic goal to maintain it. So we feel we need to prepare financial forecasts that show different scenarios and allow us to make better educated decisions," says Cadieux, who looks to other key members of the facility and staff to offer insights into these forecasts.