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Improving Cash Flow in Your Senior Living Community

Historically, senior living housing providers do not enter the business to make a profit. As a society, we have a moral responsibility to house and care for older adults. But whether you operate a for-profit or nonprofit community, it’s imperative to keep a close watch on budget and cash flow.

Many nonprofit operators traditionally would have a lot of waste in their budgets. The “no mission, no margin” theory suggested an attitude shift and a realization of a need to do better. Principles of for-profit apply in how you can honor your mission while remaining good stewards of your resources. Finding a way to benefit both your residents and your organizational bottom line is key. For-profits can learn from nonprofits about mission and vision while nonprofits can learn from for-profits to honor their history and remain financially solvent in a highly variable market.

Budgeting versus cash flow management

Your budget is like a flight plan. Your destination is set, but the route can be changed based on unpredictable factors. Look at one year of past data. Due to the volatility of reimbursement data, any information older than one year is not likely to be relevant.

An example: a single-site nonprofit operates on a calendar year budget cycle. Cost reporting must be filed by May. A projected budget is completed by August. Medicare reimbursement rates are set by September 31. The projected budget is submitted to the board for approval in October.

How to structure a budget:

  • Expenses
    1. Annualize current YTD expenses
    2. Consider anticipated expenses in new budget compared to current
    3. Calculate new budget FTEs, considering possible shifts in expenses (e., perhaps the organization is moving toward specialization of some sort)
    4. Renegotiate current contracts or RFP new vendor opportunities in line with mission and budget strategies
    5. Complete competitive analysis regarding appropriate new pay rate for staffing
    6. Consider fixed and variable costs in the context of the overall budget strategy and determine where expense adjustments might be possible
  • Revenue
    1. Complete competitive analysis regarding new pricing for organization’s daily private room rate
    2. Calculate anticipated ancillary revenue from pharmacy, DME and other potential sources
    3. Develop census mix to include Medicare RUG rates, Medicare Care Advantage Plan average rates, Medicaid per diem rate and private pay rate along with ancillary revenue calculations to determine overall budget revenue total

While the budget is like a flight plan that can be adjusted throughout the course of a year, the balance sheet is the organization’s report card. Remember to review the balance sheet during budget development and throughout the budget year. Consider the following:

First, look at your REVENUE.

  • How much available cash on hand do you have? How many days could the organization pay its bills based on the available cash? This includes debt, accounts payable, payroll, etc.
  • Accounts receivable: How quickly is the organization being paid? There should be no outstanding private pay monies owed to the organization. While government and insurance payers can be slow, do not hesitate to aggressively collect what is owed to the organization. Services were provided in good faith; collect what is due.
  • Investment revenue (restricted vs. unrestricted): Consider what you can get your hands on quickly.

Second, compare your LIABILITIES and EXPENSES.

  • Accounts payable: What does the organization owe to its vendors and suppliers? They need to be paid in a timely manner, as well. Does the organization use a line of credit and, if so, is it used to cover the time gap of slow payers like Medicare Advantage Plans and then paid off when the money comes in?
  • Depreciation (building, equipment)
  • Lending debt: This includes all debt,e., line of credit, bond payments, capital improvement debt if different from the purpose of a bond debt, etc.

Next, subtract LIABILITIES and EXPENSES from REVENUE to get your overall financial picture. While this information is potentially simplistic, it will provide the baseline snapshot of current organizational health.

Planning for the future

How far back in time should an organization analyze to create an accurate budget and cash flow picture? I recommend looking back one year, then factor in local and national trends and how the industry is moving. In the senior living industry, strategies for the long-term are now considered to be no more than three to five years. You must understand your business, and the way the industry is moving, to survive.

Top tips for strategic planning

  1. Look at organizational opportunities for sustainability and capacity from a position of strength. Make sure your board and/or executive leadership understands the marketplace.
  2. Develop a skill set analysis of what is needed for each board member and/or executive leader. Make sure they fully understand their legal and fiduciary responsibilities. Provide training to ensure each person knows his or her role.
  3. What internal operational issues need to be addressed in order to position the organization from strength? What does the staff need to know? Identify staff willing and able to move the organization toward sustainability.
  4. Know your local competition and its impact on your business. For example, if you are a nonprofit skilled nursing center in a saturated market, are you willing and/or able to make an investment to specialize into a niche market?
  5. For-profit vs. nonprofit: Would restructuring make more sense moving forward? If so, what should be considered?
  6. What is the organization’s overall strategy for sustainability and capacity? Is it making budget, expanding the mission, specialization or serving the underserved?
  7. What does it mean to sustain the organizational mission?
  8. What resources does the organization need to consider in order to focus on the appropriate next steps?
  9. When considering future sustainability strategy, what are the non-negotiables?
  10. Boards and executive leadership must focus on the future of the organization and its mission and consider its responsibility to the overall local community when looking at strategy.

United Church Homes Management (UCHM) provides senior living management services and expertise for single site or life plan nonprofit communities, for-profit single site or multi-site senior healthcare communities and affordable housing communities. UCHM can help you identify and address challenges to help your senior living community maintain occupancy, deliver high-quality care and remain sustainable well into the future. Call (616) 914-3568 or visit uchmanagment.org to learn more.