Health Financial Management: Business Case & Zero-Based Budgeting

This health business case report outlines the financial plan for establishing a healthcare center using zero-based budgeting. It details the purpose and objectives, planned services, potential costs and expenses, expected benefits, and significant risks. The report includes a financial activity analysis, a break-even analysis, and a contingency plan addressing potential funding shortfalls. It covers resource requirements, outcome reporting, and budget build-up, providing a comprehensive overview of the financial management strategies for the healthcare center. The analysis includes projected revenue and expenses over five years, net present value calculations, and payback period estimations.

Health Financial
Management
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
1 | P a g e

2
Executive Summary
A health business case report has been prepared which also shows how the zero based budgeting is
being done and the entire financial plan is to be prepared for setting up of the health care centre. In the
given report, the purpose and the objective of setting up the health care centre has been given along
with the plans of what all services will be there, what will be the potential costs and expenses and what
will be the expected benefits, What are the significant risk that could be faced, what will be the entire
process and what will be the resources required.
2 | P a g e

3
Contents
Executive Summary.....................................................................................................................................2
Outline.........................................................................................................................................................4
Background..................................................................................................................................................4
The Proposal................................................................................................................................................4
Risks.............................................................................................................................................................5
Process........................................................................................................................................................5
Requirement of Resources..........................................................................................................................6
Reporting of the outcomes..........................................................................................................................6
References.................................................................................................................................................13
3 | P a g e

4
Outline
A health business case plan has been prepared supported by the financial and non-financial data. It
discusses the breakeven analysis and all the forecasts have been made through zero-based budgeting.
The project has a huge value to the Local Health District as it would serve one of the major project
requirements of public health and safety in the area (Baker, 1989). Off late, there has been increasing
focus on prevention from diseases, the increase in the number of beds and hospital units such that
major surgeries can be done in the district itself without going outside the district.
Background
The given services are required to be introduced simply because of the fact that the quality of the health
care needs to be improved in the region and join hands with the government in this approach. The plan
discusses the operating budget, the fixed and variable cost requirement, the space requirement and the
timeline of the project as well. The aim of the project is to provide quality services at affordable costs
and therefore the breakeven analysis has been done in financial analysis (Bogle, 2018).
The Proposal
The proposal of the health business case plan at the very outset is to set up a health facility, which
should be efficient, financially feasible, and operationally achievable.
Aims: The aim is to have a comprehensive health care facility for the community with the adequate
number of beds and medical staff at affordable costs (Choy, 2018).
Benefits: There will be a number of benefits out of the project like those of introduction of many health
care facilities and services, which were not there in the city earlier. The expected benefits for the
different stakeholders are mentioned below in the table:
Factor Benefits
Patients They would not have to travel to other cities in search of good and quick treatment; this
would be available in the town itself and that too at affordable costs (Erik & Jan, 2017).
Facility The local district and community would benefit out of the facility given in the hospital as it
would be giving comprehensive health care facility.
Clinicians The nurses and the doctors in the local region would not have to go far in search of the
employment opportunities and it would be available in the city itself and therefore there will
be a 2-way benefit (Dichev, 2017).
Other There would be several other financial and non-financial benefits, as it would help in
4 | P a g e

5
reducing the patient stay at hospital from nearly 4 day to 2.5 days.
Risks
Besides the benefits, there are several inherent risks as well in the project, which have been mentioned
below in the table:
Risk Issue Severity Impact Mitigation Plan Notes
Financial
risk
Moderate Moderat
e
The contingency has been built in the
plan considering the same if the
requisite funds are not available.
NPV. Payback period
has been computed
even as per the revised
scenario.
Patients Moderate High In case the critical patients do come for
surgeries, specialist doctors need to be
there in hospital for operations. The
cost for the same has been factored in
the financials (Delone & Mclean, 2004).
The doctors and nurses
would be available all
the 7 days in a week so
it is not a cause of
worry.
Insurances High Moderat
e
The insurance of the hospital premises
and the patients is very critical so the
same has been applied for.
Necessary precautions
have been built up in
the set up plan.
Other NA NA NA NA
Process
The procedure in which the above plan will be executed has been shown below in the form of the
flowchart.
Identifying the mission, vision, aim and objective of the organization
Taking on board the people from finance, CEO and the investor to do the feasibility study
Planning of the clinical program and identifying the flow of the patient
Primary discussion with the contractors and arrangement of the space
Discussion with the medical equipment vendors, shortlisting and buying
5 | P a g e

6
Arrangement of the finances and capital
Discussion on and implementation of the IT system
Working on the admin department, staffing and the other workflows
Installation of the equipment, training and dry runs
Training of the nurses and the doctors
Trails and the Go-Live
MIS management and tracking of the project
Requirement of Resources
All the resources, which will be required, have been shown in the calculations below. There would be
space requirements for the main campus and administrative building of the hospital and for the parking
area of the ambulance and other patient vehicles. The radiology machines, the X-ray equipment’s, the
operations theatres and other surgical equipment is which will be very necessary and will be planned as
per the circumstances of the case (Fukukawa & Mock, 2011). Initially, the proposed strategy
implementation and investment period has been assumed to be for the period of 5 years and therefore
the simulation of calculations has been given for the same period.
Reporting of the outcomes
The dedicated finance team of the health care unit will do the financial result and the tracking of the
project. This will consist of two accountant who will be reporting to the top management of the unit
regarding the financial performance of the unit. They will also be responsible for monitoring the savings
and the outcomes of the project through a monthly MIS report (Fay & Negangard, 2017). They will also
highlight the possibility of the cost savings or increasing the revenue by any means in the future. The
report will be sent out monthly to the management and they will have a quarterly meeting to take the
initiatives forward and discuss on current and future issues, if any (Hepp, 2018).
Budget build-up and financial activity
6 | P a g e

7
For the given project in hand, the budget has been build up based on zero-based budgeting. Zero based
budgeting means the budgeting, which has no base of last year or industry and is not based on past
precedence’s. It has a number of advantages of traditional costing and budgeting and aims to eliminate
all the legacy or non-warranted costs (Jefferson, 2017).
In the old times, the capital charge in the form of depreciation, interest, debt repayment and the
dividend were being ignored in the financial statements and were being considered as free of cost or
free goods as most of these assets like those of building and significant equipment were being financed
by the government but post 2005, the same has been started to be considered. In the modern scenario
as well as in the given case, the organization is required to pay for the assets and thus there is a pressure
on the organization to make a savings in the capital charge as well (Kew & Stredwick, 2017).
The profit and loss account has been prepared for the health care unit based on the different items of
the income statement and the costs have been divided into fixed, variable and semi variable costs and
the capital costs. The capital costs have been assumed to have been incurred only in the 1st year of
operation and then the costs are shown as fixed and the variable costs (Heminway, 2017).
ABC Health Care Centre
Break Even Analysis
Expenses Particulars
Amount
($) Income Particulars
Amount
($)
Staff costs 8 x Nurses @ 50.00 x 8 x 5 832,000
Patient
revenue
4 x Nurses @ 60 x 8 x 2 199,680
Weekly X rays
(week) X ray x 10 x 70 x 10 x 5 1,820,000
Weekly X Rays
WE X ray x 10 x 40 x 10 x 2 416,000
Weekly On costs 15% 18,000
Yearly cost (F) 120,000
Other revenue
from
Emergency
service and
ambulatory
services
Consumab
les X Ray films x 5 x 25 x 8 x 5 260,000 250,000
X Ray films x 5 x 12 x 8 x 2
(W/E) 49,920
Yearly cost (F) 20,000
Electricity 4000 x 4 (F) 192,000
Water 1500X 4 72,000
Yearly cost (F)
7 | P a g e

8
50,000
Admin
support 2 FTE @ 20.00 x 10 x 7 145,600
Rent on
Building 5000 per week (F) 260,000
Yearly cost (F) 30,000
Depreciati
on on
equipmen
t
250,000* x 20% (F) 50,000
Yearly cost (F) 10,000
Total 2,309,200 Total 2,486,000
ABC Health Care Centre
Statement of Revenue and Expenses
Projected for the next five years
Particulars / Years 0 1 2 3 4 5
Net patient service revenue - 2,236,000 2,347,800 2,512,146 2,725,678 2,970,989
Other Income - 250,000 262,000 275,000 290,000 312,000
Total incremental revenue - 2,486,000 2,609,800 2,787,146 3,015,678 3,282,989
Expenses
Building 420,000 - - - - -
Equipment’s 250,000 - - - - -
Furniture 65,500 - - - - -
Other capital costs 41,000 - - - - -
Setting up costs 22,750 - - - - -
Operating Expenses - - - - - -
Fixed Expenses - 732,000 732,000 732,000 732,000 732,000
Variable Expenses - 1,577,200 1,561,428 1,592,657 1,632,473 1,697,772
8 | P a g e

9
Total incremental expenses 799,250 2,309,200 2,293,428 2,324,657 2,364,473 2,429,772
Incremental income year wise
(799,250) 176,800 316,372 462,489 651,205 853,218
Computation of the Net present Value and other parameters of the Company
Year Net Cash inflow PV factor
(10%) P.V. Amount of Flows
0 $
(799,250.00) 1
$
(799,250.00)
1
$
176,800.00 0.909
$
160,711.20
2
$
316,372.00 0.826
$
261,323.27
3
$
462,489.44 0.751
$
347,329.57
4
$
651,205.44 0.683
$
444,773.31
5
$
853,217.57 0.621
$
529,848.11
Total Cash inflow
$
1,743,985.47
Net Present Value
$
944,735.47
Pay Back Period 2.66 Years
Discounted Pay Back
Period 3.07 Years
In case the desired funding is not available to the given optimum desired level and is less by 10% than
the optimal budget, then the possible deletions and the costs cutting measures would be on account of
staff costs which would be reduced from 8 and 4 nurses respectively to 7 and 3 nurses. Furthermore, the
admin salaries would also be reduced from $ 20 to $ 16.5 per hour and finally the rent on building would
be reduced from $ 5000 per week to $ 4000 per week (Werner, 2017). The yearly cost would also be
reduced from $30000 to $ 20000. The rest of the expenses could not be saved or lowered being fixed in
nature. All these savings would help in reducing the overall operational expenditure from $2309200 to $
2067800. In addition, there has been savings in the capital cost upfront in building, setting up costs,
furniture and other capital costs (Linden & Freeman, 2017). The revised simulation in such a scenario
has been shown below:
ABC Health Care Centre
Break Even Analysis
Expenses Particulars Amount Income Particulars Amount
9 | P a g e

10
($) ($)
Staff costs
8 x Nurses @ 50.00 x 8
x 5 832,000
Patient
revenue
4 x Nurses @ 60 x 8 x 2 199,680
Weekly X rays
(week)
X ray x 10 x 70 x
10 x 5 1,820,000
Weekly X Rays
WE
X ray x 10 x 40 x
10 x 2 416,000
Weekly Oncosts 15% 18,000
Yearly cost (F) 120,000
Other revenue
from
Emergency
service and
ambulatory
services
Consumabl
es
X Ray films x 5 x 25 x 8
x 5 260,000 250,000
X Ray films x 5 x 12 x 8
x 2 (W/E) 49,920
Yearly cost (F) 20,000
Electricity 4000 x 4 (F) 192,000
Water 1500X 4 72,000
Yearly cost (F) 50,000
Admin
support 2 FTE @ 20.00 x 10 x 7 145,600
Rent on
Building 5000 per week (F) 260,000
Yearly cost (F) 30,000
Depreciatio
n on
equipment
250,000* x 20% (F) 50,000
Yearly cost (F) 10,000
Total 2,309,200 Total 2,486,000
10 | P a g e

11
ABC Health Care Centre
Statement of Revenue and Expenses
Projected for the next five years
Particulars / Years 0 1 2 3 4 5
Net patient service revenue - 2,236,000 2,347,800 2,512,146 2,725,678 2,970,989
Other Income - 250,000 262,000 275,000 290,000 312,000
Total increamental revenue - 2,486,000 2,609,800 2,787,146 3,015,678 3,282,989
Expenses
Building 420,000 - - - - -
Equipments 250,000 - - - - -
Furniture 65,500 - - - - -
Other capital costs 41,000 - - - - -
Setting up costs 22,750 - - - - -
Operating Expenses - - - - - -
Fixed Expenses - 732,000 732,000 732,000 732,000 732,000
Variable Expenses - 1,577,200 1,561,428 1,592,657 1,632,473 1,697,772
Total increamental expenses 799,250 2,309,200 2,293,428 2,324,657 2,364,473 2,429,772
Increamental income year
wise (799,250) 176,800 316,372 462,489 651,205 853,218
11 | P a g e