Joint resolution blending finance and strategy: CFOs should play an active leadership role in the healthcare organization's strategic planning process

Healthcare Financial Management, Nov, 2004 by Jason H. Sussman, Mark E. Grube

AT A GLANCE

When strategic planning and financial planning are disconnected processes, healthcare organizations can rarely accomplish the integrated, analysis-based decision making that ensures long-term access to capital. CFOs need to be actively involved in an integrated planning approach to ensure its success.

Sandy Johnson, CFO of Southwest Health System, is plenty concerned. Responding to both community and physician demand, the system has engaged an architectural firm to manage a master facility planning effort to Build additional inpatient capacity. The project is estimated to exceed $200 million.

Sandy's concerns are those experienced by CFOs everywhere. Can the system afford the expansion? Does it have access to the necessary, capital? The system's financial picture isn't particularly strong. Operating performance has Been deteriorating and could soon start to threaten the system's "A" credit rating. Although it has been the dominant provider in its county, the system has a limited regional market presence and no plans to increase it.

Alter nine months of work, the master facility planning process has bogged down due to the absence of both a clear supporting strategy and an understanding of the system's capital capacity. As the executive team begins to work through the financial implications of a new facility plan, the team's comfort level about the strategic and financial underpinnings for inpatient expansion decreases significantly. A much- needed time- out is called to conduct an integrated strategic and financial planning analysis.

A New, Integrated Approach

Strategy and finance are integrally connected disciplines. Financial success depends on implementation of a rock-solid strategy. Successful implementation of a chosen set of strategic initiatives requires development and implementation of a solid financial plan that accurately reflects financial performance and capabilities. No organization can pursue strategies that it cannot afford. Similarly, no organization can ignore strategic opportunities needed to ensure its future financial viability.

Disconnected or minimally connected strategic and financial planning processes lead to a mad scramble to reconcile the results of disparate efforts after they are completed. Often, opposing camps attempt to resolve irresolvable differences, resulting in patchwork solutions. All too often, initiatives devised during the strategic planning process, such as the major inpatient expansion at the hypothetical Southwest Health System, cannot be financed. Just as often, major market opportunities are overlooked, thereby undermining organizational competitiveness. In a disconnected planning environment, decisions made by executives fail to effectively balance strategic direction and investment with the organization's financial capabilities.

The CFO must play a significant leadership role in ensuring the proper marriage of strategy and finance and must be at the table throughout an integrated planning process. The CFO is uniquely positioned to ensure development of a reliable financial fact base against which strategies are created and evaluated. Southwest Health System established a truly integrated strategic financial planning process. A description of the nine critical activities directed by Sandy Johnson provides practical guidance on how CF0s can and must affect: the analysis and formulation of organizational strategy.

Assessing the Strategic Financial Position

The first phase of integrated strategic financial planning involves an assessment of the organization's market and financial situations, or its strategic financial position. In an organization with a disconnected strategic planning process, this stage would focus exclusively on a market assessment and would be performed solely by strategic planning staff. In an organization with integrated strategic financial planning, the CFO, his or her finance staff, and strategic planning staff are intimately involved in assessing the strategic financial position.

Analyze the organization's current credit profile.

One of the first activities the CFO directs is the comparison of the organization's financial performance with performance of organizations that maintain access to capital at levels consistent with the CFO's own organization. Rating agency medians facilitate this comparison. A close analysis of financial statistics and ratios, such as operating and EBITDA margins, days cash on hand, debt service coverage, and cash to debt, can give organization leaders an objective means to identify financial strengths and weaknesses. Proper credit analysis provides a basis for access to capital-based decision making about strategic options.

Sandy found that the system's size (measured by net patient revenues) was consistent with "A"-rated organizations, but was concerned about the system's decreasing profitability, as indicated by downward trends in operating. EBITDA, and excess margins. In addition, although placing constraints on capital spending had improved the system's liquidity, it also led to a rapid rise in the average age of plant, increasing the need to invest in facilities. Overall, the credit analysis demonstrated the need for the system to focus on improved operating performance and increased cash reserves to maintain its "A'" rating and the associated level of access to external capital. The financial position analysis also allowed system executives to calculate the organization's real debt capacity as well as the level of profitability required to maintain the current levels of capital access.