Financial Assessment of Community Health Clinics

1
Financial Assessment of Community Health Clinics

• Building Capacity Community Clinics Initiative
• Tides Foundation
• Prepared by Annie Burke
• August 8, 2002

2
Contents

• Executive Summary and Objectives
• Profile of the Data
• Days Cash on Hand, Revenue and Short/Long Term
  Debt
• Accounts Payable and Accounts Receivable Turnover
• Current Ratio and Cash Position
• Recommendations
• Appendix

3
Executive Summary

• The objectives of the assessment are to determine
  the financial health of Californias community
  health clinics and to conduct a comparative
  analysis of the clinics financial health. Data
  for the analysis is based on financial statements
  included in the proposals submitted to the
  Community Clinics Initiative.
• The clinics were analyzed based on the following
  measures Days Cash on Hand, Revenue Sources,
  Short term and Long term Debt, Accounts Payable
  Turnover, Accounts Receivable Turnover, Cash
  Position and Current Ratio
• Several challenges presented themselves in the
  assessment. The first is that not all clinics
  operate from the same business model. Secondly,
  the number of total clinics analyzed varies from
  measure to measure because of incomplete data
  from particular clinics. Lastly, the data used
  for this analysis was pulled from only one years
  financial statement and not all from the same
  year (e.g., 1998-2001).
• 135 of the 151 clinics provided financial
  statements with their proposals. The 135 clinics
  were grouped according to their financial health
  based on their Days Cash on Hand into the
  following categories
• The review found varying levels of financial
  health across the clinics with nearly even
  distribution of strong, healthy and weak.
• It is recommended that a more detailed analysis
  be conducted of the clinics financial health and
  management abilities. In order to do this more
  information is required, including multi-year
  financial statements, business plans and
  strategic plans.

4
Objectives of the assessment

• Determine the financial health of the community
  health clinics which have submitted proposals to
  CCI
• Conduct a comparative analysis of the clinics
  financial health using the following measures
• Days Cash on Hand, Revenue sources, Short and
  long term debt
• Accounts Payable Turnover and Accounts Receivable
  Turnover
• Cash position and Current Ratios

5
Contents

• Executive Summary and Objectives
• Profile of the Data
• Days Cash on Hand, Revenue and Short/Long Term
  Debt
• Accounts Payable and Accounts Receivable Turnover
• Current Ratio and Cash Position
• Recommendations

6
Challenges in working with the data

• Not all clinics operate from the same business
  model. While every clinic has a similar mission
  (provide primary health care to under-served,
  low-income communities), the business models of
  the clinics vary greatly. For example, some
  clinics are associated with large national
  organizations (e.g., Planned Parenthood and
  Indian Councils) while others are locally based
  with one or two facilities. These differences
  impact our analysis because we are not comparing
  apples to apples. Therefore, all analysis
  included here is intended to be high-level and
  general.
• The number of total clinics analyzed varies from
  measure to measure because of incomplete data
  from particular clinics. Some clinics were not
  included in the analysis of some or all measures
  due to lack of information. There is great
  variation in the amount of information that is
  provided in the clinics financial statements.
• The data used for this analysis was pulled from
  only one years financial statement and not all
  from the same year (e.g., 1998-2001). CCI
  requires in a proposal the submission of the most
  recently audited financial statements. A more
  comprehensive analysis will need to be conducted
  in order to assess trends and the current
  financial health of the organization. Additional
  data could include, but is not limited to,
  multi-year financial statements, strategic plans,
  and interviews.

Two organizations were excluded from analysis
(St Anthony Foundation and Council of
Foundations) because their business models are
significantly different than the rest of the
population.
7
Characteristics of the data used in assessment

• The data for this assessment was gathered from
  the 151 community health clinics which have
  submitted proposals to the Community Clinics
  Initiative in RFP 3, 4 or 5.
• Of the 151 clinics, 135 (or 90) of them provided
  financial statements in their proposals and
  therefore sufficient data for this assessment.
  14 clinics did not include financial statements
  in their proposal (and were not included in the
  assessment). They are listed in the Appendix.
• Of the 135 clinics for which we have financial
  statements, a little over half of the statements
  (54) were from the fiscal year 2000.
• Of these 135 clinics, 119 of them were accepted
  and 17 declined grants from CCI.

Year Reported
Proposal Status
Financial Statements
N151
N135
N135
8
Contents

• Executive Summary and Objectives
• Profile of the Data
• Days Cash on Hand, Revenue and Short/Long Term
  Debt
• Accounts Payable and Accounts Receivable Turnover
• Current Ratio and Cash Position
• Recommendations

9
Measure One Days Cash on Hand

• Days Cash on Hand (DCOH) measures the number of
  days of operating expenses (less depreciation)
  that could be met with available unrestricted
  cash and investments, if no additional revenue
  were received. Generally it is recommended to
  have between 30-60 days (or greater) of cash on
  hand.
• The following outlines the Days Cash on Hand for
  135 community health clinics. There is a
  significant amount of clinics (23 or 17) with
  more than 120 days. The largest group of clinics
  (51 clinics or 38) have less than 30 days of
  cash on hand.

Number of Clinics
Less than 30 days
30 60 days
60 90 days
90 120 days
120 days

• This understanding of Days Cash on Hand will
  inform the remaining analyses

Less than 30
30 - 60
60 - 90
90 - 120
120
10
Measure One Days Cash on Hand (continued)

• Going forward the clinics will be grouped
  according to their days cash on hand. DCOH was
  selected because of its ability to demonstrate
  the managements capacity to manage their
  organizations finances.
• A complete list of the clinics in each group is
  listed in the Appendix.

DCOH
Less than 30
30-60
60-90
90-120
120
A(17)
B(20)
C(26)
D(37)
Groups

• A high-level description of these clinics is
  provided on the next page

11
Measure One Days Cash on Hand (continued)

• Group A Extremely financially strong clinics
  (23)
• With over 120 days of cash on hand, these
  clinics are very flexible and healthy
  organizations. Their total assets are strong
  with long term investment dollars. The majority
  (15 or 65) have long term investments and of
  those with investments 60 have over 2M
  invested. It may be the case that some clinics
  are saving cash in order to make a capital
  purchase soon. It appears that about half of
  them are affiliated with large, national
  organizations like Planned Parenthood or an
  Indian Council.
• Group B Financially strong clinics (26)
• These are also flexible and healthy
  organizations, but generally without the support
  of a parent organization. To have between 60 and
  120 days of cash on hand is a demonstration of
  strong financial planning and management. Unlike
  Group A, only 6, or 23, of Group Bs clinics
  have long term investments.
• Group C Financially healthy clinics (35)
• These clinics are considered healthy in that
  they are maintaining 30-60 days cash on hand.
  Group C generally is financially healthy, but
  will need more analysis in order to fully
  understand their situation. The multi-year
  trends will be critical to a complete
  understanding of their issues and strengths.
• Group D Financially weak clinics (51)
• With less than 30 days cash on hand, these
  clinics struggled during the fiscal year
  reported. It could be that they had just made a
  major capital purchase in the last year. Sixteen
  clinics in Group D had less than 50,000 of cash
  and cash equivalents, with 3 less than 1,000 and
  one with a negative 90,000.

12
Measure Two Revenue Sources

• To better understand the business models of the
  clinics, the following two pages highlights their
  revenue sources. The intent is to break down the
  revenue sources to provide a general picture of
  how these clinics are earning money. Because of
  the clinics different business models, its
  difficult to construct a detailed analysis
  without more information like strategic plans.
• For purposes of this assessment the revenue falls
  into one of the following seven common sources
  Net patient, Government grants / contracts,
  Foundations, Fundraising / Contributions,
  Investments, Unspecified, and Other. Some clinics
  did not specify their revenue sources or simply
  stated General Revenue. These line items have
  been grouped together under Unspecified.
• The following provides the average percentages
  for each revenue source across all 135 clinics.
  Not surprisingly, Net Patient Revenue is the
  largest source with 45.

Revenue Sources for All Clinics
13
Measure Two Revenue Sources (continued)

• The following summarizes the average percentage
  for each revenue sources by Group. Between
  groups, the revenue sources vary in size, except
  that Net Patient Revenue is consistently the
  largest source.

Group B Financially Strong (26 clinics)
Group A Extremely Financially Strong (23 clinics)
Group C Financially Healthy (35 clinics)
Group D Financially Weak (51 clinics)
14
Measure Three Short and Long-term Debt

• A component of the Building Capacity program is
  to develop capacity for the clinic to plan for
  and manage capital, which might entail managing
  debt. For that reason, clinics with short term
  and long term debt were tallied.
• The following table highlights the percentage of
  clinics in each group and overall who has short
  and long term debt. There does not seem to be a
  correlation between groups (which is based on
  days cash on hand) and debt. The data does show
  that debt is prevalent throughout the clinics.

15
Summary of DCOH, Revenues, and Short/Long term
Debt

• DCOH is the starting point for this analysis
  because it highlights the organizations
  flexibility and power. But further exploration
  of the clinics cash position will need to be
  conducted, for example, were they saving for, or
  did they just make, a major purchase? Analysis
  of multi-year financial statements will hopefully
  tell a more complete story of the clinics DCOH.
  
• Revenue from patients and government
  grants/contracts are the two largest pieces of
  the pie for all groups. Clinics may be challenged
  with generating sufficient revenue in the future
  because of new governmental policies and
  processes (e.g., Prospective Pay System).
• A significant distinction between the Groups is
  how the revenue sources are distributed. Group A
  clearly has a more balanced portfolio versus
  Groups B, C and D. This might contribute to
  Group As financial strength.
• There doesnt seem to be a distinct pattern for
  either short term or long term debt. There is a
  significant difference between Group A and Group
  D in their short term debt position - only 35 of
  clinics in Group A have short term debt, while
  61 of clinics in Group D do. This is most
  likely due to the groups access to liquid assets
  Group A with a lot of cash and Group D with
  relatively little.
• These measures provide a perspective on the
  financial status of the 136 clinics. More
  information and additional measures will add to
  the current perspective so that we can fully
  understand the financial health of the clinics
  (some of additional measures are found in the
  next sections of this document).

16
Contents

• Executive Summary and Objectives
• Profile of the Data
• Days Cash on Hand, Revenue and Short/Long Term
  Debt
• Accounts Payable and Accounts Receivable Turnover
• Current Ratio and Cash Position
• Recommendations

17
Measure Four Accounts Payable Turnover

• Accounts Payable Turnover measures the average
  number of days it takes an organization to pay
  its vendors and suppliers. Organizations should
  strive to maintain AP Turnover under 60 days.
• Salaries/Payroll data is required in order to
  calculate the AP Turnover. 30 of clinics did
  not provide this information in their financial
  statements, therefore the sample size for this
  measure is considerably smaller than other
  measures (N103).
• As shown in the graph below, the majority of
  clinics (61 of 103) pay their AP in 30 days or
  less. But the majority of Group D (17)
  turnaround their AP in 31-60 days.

Accounts Payable Turnover
Number of Clinics
Days
18
Measure Five Accounts Receivable Turnover

• Accounts Receivable Turnover measures the average
  number of days it takes the organization to turn
  all of its receivables into cash.An organization
  wants to have as low a receivables turn as
  possible in order to use its revenue for
  operations as quickly as possible.
• It is important to note that an organization
  cannot always control its AR Turnover. The days
  it takes to be paid for services somewhat depends
  on the customers systems.
• The following graph depicts the number of clinics
  in each group that have 0-30, 31-60, and gt60 days
  of AR Turnover (N132). Group As clinics are
  concentrated in 0-30 days, Groups B and C are
  generally in 31-60 days, and Group Ds clinics
  generally take longer to turnaround their AR.

Accounts Receivable Turnover
19
Summary of Accounts Payable and Accounts
Receivable Turnover

• Both Accounts Payable Turnover and Accounts
  Receivable Turnover reflect the ability of an
  organizations accounting systems to move money
  in and out of the organization.
• Group A continues to show its strength with low
  days for both AP and AR Turnover. It appears
  that their internal systems are generally
  efficient.
• Groups B and C have similar patterns in that most
  of the clinics pay their vendors and suppliers
  within 30 days and it takes them 31-60 days to
  get paid for their services. This augments
  earlier perspectives on these clinics in that
  they are relatively efficient at managing their
  finances.
• From our data, we can see that most clinics in
  Group D take between 31-60 days to pay their
  vendors and suppliers and it takes over 61 days
  for them to be paid for their services.
  Generally, Group D clinics are cash-strapped and
  it appears that theyre not taking advantage of
  potential internal efficiencies.

20
Contents

• Executive Summary and Objectives
• Profile of the Data
• Days Cash on Hand, Revenue and Short/Long Term
  Debt
• Accounts Payable and Accounts Receivable Turnover
• Current Ratio and Cash Position
• Recommendations

21
Measure Six Current Ratio

• Current Ratio measures the extent to which an
  organization can cover its current obligations
  (those due within one year) with its current
  assets (cash, receivables, and other assets that
  will be converted to cash within one year). Its
  calculated by dividing current assets by current
  liabilities.
• Organizations should strive to maintain a ratio
  of 1.25 times or higher. As the graph below
  shows, Group Ds clinics are less able to cover
  their obligations than clinics from other Groups.
  

Current Ratio
Number of Clinics
Current Ratio
22
Measure Seven Cash Position

• In order to understand more about the clinics
  liquidity, we calculate their Cash Position (Cash
  and Cash Equivalents over Total Current Assets).
  Because the clinics vary in size and in how they
  operate, it would not be meaningful to compare
  dollar amounts of Cash and Cash Equivalents.
• As shown below, the slight increase from Group A
  to Group B might be because of the large amount
  of long term investments (which are not included
  in Cash) that clinics in Group A generally have.

Cash Position
23
Summary of Current Ratio and Cash Position

• It is not surprising to find that the Cash
  Position decreases from Group B to C to D because
  the groups are classified by their days cash on
  hand. As mentioned on the previous page the
  slight increase from Group A to Group B can be
  easily explained with Group As long term
  investments.
• Because of strong current assets, which include
  cash and investments, Group A continues to show
  that its a financially powerful group of
  clinics. Theyre able to cover their liabilities
  easily which enables them to behave more
  strategically.
• The analysis on Groups B and C continues to show
  that these clinics are relatively efficient and
  generally able to cover their liabilities
  comfortably.
• Group Ds clinics do not have a high percentage
  of cash available to cover their liabilities
  therefore their Current Ratio is generally low.
  These measures reinforce earlier measures in that
  Group Ds Cash Position reflects their low Days
  of Cash on Hand.

24
Contents

• Executive Summary and Objectives
• Profile of the Data
• Days Cash on Hand, Revenue and Short/Long Term
  Debt
• Accounts Payable and Accounts Receivable Turnover
• Current Ratio and Cash Position
• Recommendations

25
Recommendations for further analysis

• It is recommended to customize a more detailed
  financial analysis to fit the objectives and
  design of the Building Capacity program. This
  current assessment was focused on understanding
  the financial health of the community health
  clinics based on the financial statements that
  CCI currently has. We now have an opportunity to
  conduct a more thorough analysis and the context
  is critical to that effort. For example
• Consider including clinics strategic plans, if
  available, in the analysis. With the financial
  statements we have the results and it would be
  beneficial to understand the plans that drove
  those results.
• Consider including clinical performance measures
  in the analysis. Trends of patient visits and
  quality measures will illuminate valuable
  insights into the clinics viability.
• Request multi-year financial statements from
  Groups A and B. Trends need to be identified for
  at least the financially strongest clinics, if
  not from the entire population.
• Make a specific request for certain financial
  data from all clinics program expenses,
  explanation of revenue sources, break down of net
  patient service revenue, and break down of AP and
  accrued expenses. Some clinics do not report
  this data in their financial statements and it is
  helpful in understanding the clinics financial
  health as well as calculating certain formulas
  and ratios.

26
Appendix

• Clinics and Locations by Group
• Clinics with Missing Information

27
Appendix Group A Clinics and Locations
28
Appendix Group B Clinics and Locations
29
Appendix Group C Clinics and Locations
30
Appendix Group D Clinics and Locations
31
Appendix Clinics with Missing Information
Financial Statements were not included in the
proposals submitted by the following clinics.
These clinics were not included in the analysis.