Memorial Hermann Katy Financial Plan
Memorial Hermann Katy Hospital has two main sources of income. These are the income generated from the services offered in the Rapid Admit Unit and Convenient Care Unit. The hospital’s Financial Plan includes the projected revenue that the project is expecting to generate from its two units, Rapid Admit Unit and Convenient Care Center. The plan also presents the expenses that are expected to be incurred over the period of projection. The financial plan includes the revenue earned for each unit for the next five years. According to the financial projection presented in the spreadsheet, the hospital’s Rapid Admit Unit will have an increase in the total revenue for the entire period. This is due to the increase in the average visits that is expected. As the hospital spends more advertising, it increases the number of visits per years as shown in the spread sheet. For instance, in 2016, Memorial Hermann Katy Hospital will have total revenue of $1,920,000 from the Rapid Admit Unit and $2,200,000 for the Convenient Care Center.
Therefore, the total revenue for the 2016 will be $4,120,000. Considering the size of the Convenient Care Center, its expected revenue will be higher than the other unit since it has more services. The average visits per year will remain constant for the first three years for the Rapid Admit Unit and increase by 12% for the remaining two years. The cost per visit will remain unchanged for the five years resulting in the revenue increase over the years. In contrast, the Convenient Care Unit will have an increase in the average cost per visit by 10% as the number of visits remains constant over the five years.
The major costs that the facility expects to incur include the general administrative costs, advertising utilities, staff salaries, and the miscellaneous expenses. These costs are incurred based on the level of activity and revenue collected for a given period. The total costs for the first year is expected to be $1,306,700. This will increase to $1,404,895 in the following year and further to $1,511,285.75 in 2018. For the fiscal year, the hospital will incur a total cost of $1,605,938.76 and finally to $1,711,367.67. Therefore, there will be an increase in the operating costs despite the low amounts incurred. Since, the costs will be lower than total revenue over the period, there will be a surplus for the entire period which is expected to increase over the years as presented in the spreadsheet.
Theory of Constraint
Project performance is determined by the level of revenue that the facility able to generate over a year or more. It is also affected by how efficient the portion is, in carrying the activities it is expected to conduct. They are the limits that the hospital expects to encounter in the process of operation. The constraining factors have an effect of reducing the revenue generated by the organization as well as minimizing the sources of revenue that the hospital is expecting to have during its time of operation. A review of the two portions shows that the Rapid Admit Unit is likely to be ineffective for the first few years of operations. This will have an effect of lowering the revenue from the project operations; hence, lowering its financial performance.
Ineffectiveness of the project units means that there are limited activities that are carried out which lowers its efficiency and profitability in the short-run. The reduction in level of activities for the unit will make the project ineffective hence affecting its overall performance. Finally, the available funds to finance the project to completion might also be a constraining factor in the hospital. As a growing health facility, it will require more funds for completion which might be unavailable.
Funding options
The options for funding the project include Return on Investment, Philanthropy, and government grants since the project is expected to be a not-for-profit organization (Lewis, 2007). Philanthropy as a source of project funding involves the charitable contribution of funds by philanthropists or other charitable organizations in the region and the world at large (De Marco et al., 2012). Unlike the other sources of funding, philanthropy does not require any return from the surplus earned by the hospital. Return on Investment is a financial metric that compares the net surplus that the facility is able to generate over a period and the total revenue. It is a profitability metric that determines how profitable the project is and its ability to have returns to the shareholders. Finally, there could be the government funding where the government through the relevant authority contributes a grant to finance the project (Kumar et al., 2011). A grant, like philanthropy does not involve any return on the investment (Kumar et al., 2011). Project valuation techniques such as NPV and payback period can be used in evaluating the profitability of the project using the expected cash flows.
Available strategic option
The strategic option available for Memorial Hermann Katy Hospital is to seek external funding from the banks at an affordable interest rate to finance the project. With the bank loan, the hospital will be in a position to complete the project and earn enough cash flows that will refinance the loan advanced from the bank. Alternatively, considering the current position of the facility, it would be appropriate for it to seek the government funding through grant to complete the project. This would be the cheapest alternative with no costs involved.
References
De Marco, A., Mangano, G., Corinna Cagliano, A., and Grimaldi, S. (2012), Public Financing into Build-Operate-Transfer Hospital Projects in Italy, Journal of construction engineering and management, 138(11), 1294–1302.
Kumar, A. S., Chen, L. C., Choudhury, M., Ganju, S., Mahajan, V., Sinha, A., & Sen, A. (2011). Financing health care for all: challenges and opportunities. The Lancet, 377(9766), 668-679.
Lewis, M. (2007). Informal payments and the financing of health care in developing and transition countries. Health Affairs, 26(4), 984-997.
