Delivering Excellence, Partnering Success

Case Study 2Profitability Analysis - Hospital

Executive Summary The Client is a 100 bed speciality and general care hospital in Goa

in existence for over 18 years. The promoters of the hospital had a vision to expand the numbers

of beds in Goa by seeking investment by a strategic / financial investor.

The promoters appointed one of India’s best corporate finance firm, however, inspite of several efforts no investor was willing to invest into the hospital.

The main reason was lack of adequate accounting and internal controls as well as absence of a management information system which shook investor confidence.

In this respect, the promoter approached MAS to conduct a profitability analyses and to set up an accounting system and management information system commensurate with the size of business.

Process

Review of

Financial history

•The financial statements for the last 3 years were obtained and examined in minute details to understand the cost centres and revenue verticals

•A trend analyses and ratio analyses was conducted to identify the key numbers which were material to the organisations growth and needed urgent attention

Evaluation of

Processes

•Processes and controls were understood through interviews with department heads •The process from the occurrence of a transaction, to the recording of the same and further classification was evaluated

•Controls, checks and balances were analysed and evaluated for process risk management.

Preparation of

Reporting

formats

•The Income was broken down into revenue verticals based upon source of income•Costs were allocated to the revenue verticals on the basis of certain cost drivers so as to obtain a Revenue Vertical – wise P&L which reconciled with the overall P&L

•The Revenue verticals were created for a 3 year historic time horizon.

Setting up of

Accounting

system

•Revamped the system of billing and cash collection at most revenue verticals•Plugged gaps in the process flow which led to income leakages•Created a monthly management information system to enable the promoters to understand the key pain points and address them

Observations

• Though there was a minor rise in income year on year, the trend was not uniform

• Direct expenses showed an increase which was more than proportionate to the increase in revenue

• The gross margins of the company showed a declining trend in spite of a steady increase in revenue

• The staff and doctor expenses had almost doubled over a period of 2 years affecting margins

• Administrative expenses had shown a steady rise• An increasing amount of sundry debtors year on year

showed poor recovery

From Financial Statements

Observations

• Cash collection points did not have appropriate checks and balances leading to leakages

• Manual systems and computerised systems were interchangeably used causing compatibility issues

• There was a complete process failure with the pharmacy which led to double accounting and significant loss of stock

• Expired products sent for replacement were not followed up

From the Process Evaluation

Observations

• Pharmacy stock received was not accounted for on the day of receipt and were found lying on the floor for days

• There was no specific time fixed to accept purchased stock resulting in pilferage

• There were no segregation of duties amongst the pharmacy staff

• A formal process of stock audit was not conducted to reconcile the actual stock with the system stock.

From the Process Evaluation

Observations

• Cases of siphoning of cash was observed where the person issuing the medical report and collecting the cash was one and the same

• The cash collection system for the OPD patients did not have any checks and balances

• There was disgruntlement amongst the staff due to the lack of a formal increment system

From the Process Evaluation

Our Analyses

• We submitted a report on our profitability analyses which classified the income streams (constituting 95% of the income) into 3 categories. These were: Poor - which requires urgent steps and is not a profitable line of business. Reasonable - which requires better pricing and restructuring to turn more remunerative. Excellent -which gives high margins and can be considered for expansion.

• Though dialysis income was the biggest contributor to the total revenue at 16% and the overall gross margins stood at 26%, the margins at two out of the three dialysis centres were insufficient to take care of overheads.

From the Revenue Verticals

Our Analyses

From the Revenue Verticals

• While the laboratory income had gone up by 13%, drop in margins were on account of increase in laboratory expenses by 51%.

• The margins from the income from doctors were negative 44%, on account of the salaries paid to these resident doctors being far higher than the revenue they generated.

• Though it contributed only 1% of income, the margins from the CT-Scan income were extremely good, prompting focus on this stream of revenue.

Our Analyses

From the Revenue Verticals

• X-Ray margins were negative 4% mainly due to a 20% lesser charge than market rates for X rays

• More focus on ultrasonography income having margins of around 33% consistently over 3 years.

• Room rent revenue had a declining trend. No room wise occupancy data was maintained to allow further analysis.

Our Analyses

From the Revenue Verticals

• Margins from the nursing income were very high. However, income did not move in relation to occupancy rates suggesting control failure in terms of levying charges.

• In spite of being promising, margins from medical packages were showing a declining trend.

• Revenue from operation theatre was charged at 30% of the charges levied by the surgeon for performing the surgery. The resultant margins were found to be low at this rate.

Changes Suggested

• Renegotiation of the dialysis contracts at two centres to enable client to have a higher revenue share from the current 55-60% to 70%. The net savings were INR 21,39,200.

• Resident doctor charges to be increased from INR 200 to INR 300 per inpatient per day to provide an increase income of INR 21,46,421.

Profitability Changes

Increase in profits by at least 43 lakh per annum

Changes Suggested

• A 20% increase in the charge per X-Ray case based on market charges to enable an additional income of INR 2,85,277.

• Precise costing for medical packages were developed wherein the pricing was increased by 7-10% to get more acceptable margins of 25-30%. For an additional earnings of INR 3,46,300.

• Operation charges as a percentage of surgeons charges to be revised to 40% to entail an increase in profits of INR 11,30,350.

Profitability Changes

Increase in profits by at least 18 lakh

per annum

Changes Suggested

• An automated system was installed at cash collection points where there were previous instances of cash balance differences

• Wherever possible there was a segregation of duties of people handling cash and those recording the entries.

• Standard operating procedure was developed for the pharmacy including a thorough checklist for each process. Duties were defined for each pharmacy staff, with sufficient checks and balances.

Process Changes

Possible savings of INR 4 lakh annually.

Changes Suggested

• Monthly physical stock verification to be conducted, with surprise random checks of a few high value items every fortnight.

• Certain high margin income streams to be given more focus and independent market strategies to be devolved to increase the income.

Process Changes

Possible increase by

INR 15 Lakhs per annum

Changes Suggested

• The accounting system was modified to follow the best accounting policies and practices

• The presentation of the financial statements were modified to enable more conclusive reading by the user of the statement

• Decision making tools like debtors ageing, creditors ageing and cash flow statements were introduced

Accounting system changes

Impact of Our Exercise

• Within 12 months of our revamping the system and introducing the MIS, a strategic investor invested into the company at a price higher than the earlier valuation expectation

• The profitability analysis and resultant MIS enabled the company to take quick decisions which improved the income and margins

Results

Summary Actual profitability increase by changes

suggested – INR 43 Lakh per annum (100% increase in PAT)

Estimated cost saving opportunity – INR 37 lakh per annum

Delivering Excellence, Partnering Success

Thank You!!