Over the past 15 years that I’ve been connected to the CHC movement, I’ve noticed common themes. One of those themes is that these clinics tend to have young, early career leadership. I have found this to be particularly acute with clinician leaders.
The underlying reason for this is that the nonprofit field, or mission driven organizations, tend to be under funded and staffed by folks who have some form of background that leads us to prioritize making the world a better place over profit and ourselves. Typically this results in leaders that are quickly burned out, difficulty hiring an experienced leader from outside the organization due to cost, and the promotion of folks inside the organization who have shown any inclination towards leadership.
I hold nothing against anyone who finds themselves suddenly in that position – I was there once myself. Safe places to learn and develop skills around things like Operations and Finances are not always available. This is why I knew from the start that understanding finances would be one of the topics covered on this blog. Consider this post the intro.
As any good high school debater will tell you, the first thing we need to do is get straight on some key definitions.
Definitions
If you are looking for textbook definitions, you won’t find that here. I hope instead to provide information and context that gives a shared understanding of what terms mean. These are how I will use these terms in future articles.
Budget
In the context of an organization, a budget is a guess at two things
- how much it will cost over the course of the budget’s period (usually 12 months) to produce the goods and/or provide the services that are the organization’s reason for existing, and
- how much the organization will make based on the sale of those goods or services.
The fact that budgets have 2 components is important, even if our organization does not have profit as a goal. A budget is guesses at both sides of the equation and it makes a lot of assumptions.
I stress the importance of a budget being a guess or prediction because one of the pitfalls I have seen multiple times is the assumption that a budget equates to an organization’s finances or financial situation. Rather, a budget lays out the assumptions and plans, then throughout the year we compare how we are actually performing in costs and revenue to what we expected.
Finances/Finance Reports
Financials or finance reports are real numbers – they show what has actually been spent and what has been received as revenue.
A budget is a guess and a rough plan of what you think you’ll spend to achieve specific outcomes. Monthly finances or financial reports are the measure on if you are doing that.
If you do not know what reports your finance team produces on a monthly basis and where to find them, that is your first homework assignment. At a minimum, your finance team should be producing (and you should be reviewing) the following on a monthly basis:
- Balance sheet
- Income Statement
- Budget reports for budgets you oversee
- Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Revenue
Net revenue, or profit, is how much is left over after all your expenses are covered. Often you’ll just hear folks say “the net is…”
Other things you’ll hear this referred to as:
- Profit
- Loses
- Margin
If you look at nothing else on a monthly basis from your finance team, at least look at their monthly report to the board and see what the monthly and year-to-date net revenue is both for the company as a whole and for your department’s budget.
Allocations
Allocations are how shared expenses and revenue are distributed in a budget.
Every organization has departments that directly bring in revenue and those that do not. For example, in CHCs, provider visits with patients are the primary source of revenue – these are what get billed to patients and insurance, leading to revenue which is probably labeled “Patient Services” in your financial statements.
Some departments are required for the organization to operate but do not themselves create billable services. For example – the payroll team. If you get a paycheck regularly, someone is doing the work of processing time cards, balancing PTO accounts, and telling the bank how much to cut each check for. As a CHC, none of these services are billable to anyone else, so they do not generate revenue. However, if you want to keep your staff, you need to pay them, so it’s a required department.
To fund these required, but not revenue generating departments, their costs get allocated to the departments that do generate revenue. How much is allocated to each department can be done in multiple different ways.
Fixed Costs and Variable Costs
Fixed Costs are costs that are the same regardless of if your clinic seeks 1 or 10 patients in a day. For example:
- Rent or Mortgage payments on buildings
- Internet charges
- Software that charges one organizational fee
- Salaries – salaried staff, which typically includes providers, is fixed because if they see one patient that day they get paid the same amount as the days they see 24
Variable Costs are costs that vary based on the volume of whatever the business produces. For example:
- Hourly staff – this class of staff is paid for the hours worked, not a set rate.
- Most utilities
- Any software that charges by the license, such as:
- Electronic Health Records (at least the ones I have experience with)
- Patient Portals
- Microsoft Office
- Consumables – band-aids, pain relief medications, etc.
It’s important to know that variable costs are tied to different things. For example, an Electronic Health Record (EHR) that charges a fee for each provider license. This means that providers coming on board and leaving the organization can impact these charges.
I see CHCs often including things like insurance and benefits in their analysis of whether or not to expand and add additional providers, but they often do not include all of the associated costs of adding that provider.
Homework
As stated above, this post is basically a primer for other posts on this topic. You get to judge where you are in your expertise and decide what areas you want to learn about. Depending on how familiar you are with reviewing your organization’s budgets and financials, you may decide you can skip this homework.
Here’s your homework:
- Ask your finance team for the most recent financial statements
- These should also be a part of your monthly Board of Directors packet.
- Read the first page of the financials – this is where the finance team explains large differences between the budget (guesses/estimates) and actual performance.
- Highlight anything you don’t understand – if you don’t see it covered somewhere in my blog, reach out and let me know so I can cover it.
- As a member of the finance team to go to coffee and start to develop a relationship with them.
- Seriously, having a relationship with someone on the team who can answer specific questions for you in the future will be a huge help!