Case 4.6: Yakima Valley Medical and Dental Clinic
Even though the Yakima Valley Medical and Dental Clinic (YVMDC) was projecting a sizeable deficit for FY 2022 (see Exhibit 2), Tatyana Sanchez, Director of YVMDC, was optimistic about the clinic’s future. Edward Lowe, the loan officer at Umpqua Bank (UB), was not. He was alarmed that YVMDC was projecting a deficit of more than 15 percent of operating revenues. While the bank would likely continue to extend the line of credit (LOC) to its long-term client at a rate of 4 percent per year, Lowe thought he should have a more candid conversation with the clinic’s leadership team. In his most recent conversation with Sanchez, he noted, “… without changes to your current business model, we are not sure how you’ll turn this ship around. You have already tapped into the LOC several times this year alone, and your current cash balances barely cover a month of your operating expenses. If you do not report positive cash flows and a surplus in FY 2023, the bank is concerned the clinic would become insolvent and perhaps even file for bankruptcy protection.”
Sanchez knew she had a lot of work ahead. She had to develop Pro-forma Financial Statements (Statement of Financial Position and Statement of Activities) and a Monthly Cash Flow Budget for FY 2023 (July 1, 2022, through June 30, 2023). Even though the clinic had a long-standing relationship with UB, Sanchez knew that presenting Lowe with compelling evidence that YVMDC would be both liquid and profitable would allow YVMDC to secure an LOC with the bank.
BACKGROUND
Yakima Valley Medical and Dental Clinic (YVMDC) was founded in 2003 by two retired doctors who recognized the need for access to affordable medical and dental services for a largely rural and migrant population living and working in Yakima Valley.
At first, YVMDC was small and operated out of a founder’s existing medical practice. At that time, YVMDC employed the two founders and three assistants. It gradually grew its operations, and by 2009, YVMDC desperately needed new clinic space. It purchased and renovated a small building in downtown Yakima in 2018. It also invested in new equipment and hired additional staff.
In early 2020, the board decided it needed to expand its reach to a rural population that did not seek medical or dental services. The board knew it would need to invest in mobile medical and dental clinics but required a “needs assessment” to be completed before making that investment. In mid-2021, following the needs assessment report, but without prior knowledge of the magnitude of the operating and cash flow deficits, the board approved the clinic’s expansion plan, including the purchase of the mobile clinics and new staff hires.
FINANCIAL INFORMATION
Since YVMDC serves a rural migrant population, demand for its services is seasonal. Approximately three-fourths of the clinic visits are in the early spring through late summer. Exhibit 8 reports forecasted monthly gross patient revenues for FY 2023 (July 1, 2022 – June 30, 2023). In making these projections, Sanchez considered the contractual adjustments with healthcare providers and non-payment from indigent patients (also known as charity care) of 17.5 percent.
While YVMDC billed for services ten days after a clinic visit, no payments were received in the month of service. In fact, YVMDC received payment on 50 percent of its monthly billings one month following service, 30 percent two months following service, 15 percent three months following service, and finally, 5 percent four months after services were provided, and only after assigning a staff member to make regular collection calls. For example, if services were provided in July, 50 percent of revenues would be received in August, 30 percent in September, and 15 percent in October. The remaining balance would be received in November – four months later. For amounts outstanding at the end of FY 2022 – i.e., $104,580 – 50 percent of the unpaid balance will be collected in July, 30 percent in August, 15 percent in September, and 5 percent in October.
Even though demand for services was seasonal, YVMDC salaries and expenses were relatively steady throughout the year. According to management, the agency had a firm policy of regular employment for its employees, which enabled YVMDC to maintain its skilled and committed staff. Management also believed that its employment policy contributed significantly to the clinic’s reputation for quality medical and dental care. Starting in July 2022, salaries and benefits were expected to be $58,900 monthly. The substantial increase in payroll costs (i.e., from $47,100 per month) reflected the Board’s decision to expand YVMDC staffing capacity to meet client needs, the new outreach program, and cost-of-living salary adjustments. All employees were paid on the first Monday of each month for earnings from the previous month. Outstanding balances from FY 2022 ($47,100, see Exhibit 1) are expected to be paid in July 2022.
The Board had committed to investing in mobile medical and dental clinics that would be delivered on January 1, 2023. The vehicle would allow YVMDC staff to reach more clients and eliminate existing lease agreements at satellite clinics. Having negotiated with a large recreational vehicle distributor, YVMDC would invest $400,000 in vehicles and equipment. The clinic would make four equal consecutive payments to the vendor beginning January 31, 2023. The mobile clinics were expected to have a useful life of ten years and a salvage value of $20,000. Sanchez thought it would be appropriate to recognize depreciation for the vehicle upon delivery. Depreciation for existing fixed assets was estimated to be $35,250 for FY 2023.
Throughout FY 2023, monthly payments for overheads (e.g., utilities, legal fees, insurance premiums), contract services (e.g., payroll services, vehicle maintenance), and miscellaneous expenses were estimated to be $12,450, $3,250, $1,475 per month respectively. Payments for services were made the month following service. Outstanding balances from FY 2022 ($12,100, $1,800, and $900 for overhead, contract services, and miscellaneous expenses (for a total of $14,800), respectively) are expected to be paid in July 2022.
The clinic is projected to use $4,500 in medical, dental, and office supplies per month. YVMDC maintained a first-in-first-out (FIFO) inventory system, which meant older supplies had to be used first. To ensure enough supplies were available to staff, the clinic increased its monthly orders from $3,175 to $5,500 per month, irrespective of the inventory already in stock. The vendor required payments the month following delivery.
To improve the organization’s long-term solvency position, Sanchez was committed to paying down a substantial proportion of the clinic’s obligations. In January 2023, she would make a $26,156 payment to Dr. Vargas for the short-term interest-free loan. Sanchez also anticipated making payments on the third-party liability (Medicare). These payments relate to reimbursements YVMDC received that exceeded reimbursable costs (this was an error on Medicare, not YVMDC). The first payment of $25,000 is due in July 2022. The second payment of $25,000 is expected in October 2022. The final payment of $25,000 is expected in January 2023. The third-party (Medicare) liability would not have any interest cost but had a $500 late payment fee per month for payments received after the due date.
Following a discussion with the investment portfolio manager, Sanchez projected returns on the investment portfolio to be $105,720. All income from investments, including the endowment, must be reported separately under long-term investments. This will allow the Board to use funds for strategic purposes. Without prior Board approval, Sanchez has no authority to use these funds, or any returns from investments, to shore up balances in the YVMDC checking account or use funds to pay for operating expenses.
Finally, UB invoiced YVMDC interest on the line of credit if, in the prior month, the client had used the line of credit (i.e., reported a negative cash balance in Exhibit 3). The annual percentage rate (APR) for the LOC was 4 percent.
YVMDC had borrowed $450,000 to finance the clinic’s current building. UB offered the clinic a 30-year mortgage that required equal principal payments of $7,500, with the first payment on the loan beginning December 31st, 2018 (payments were semi-annually on June 30th and December 31st). The interest of 4.5 percent per annum on the unpaid balance was payable together with principal payments. In preparing the financial forecasts, Sanchez planned to show separately the two principal payments and the two interest payments (for a detailed amortization schedule, see Exhibit 8).
ASSIGNMENT
Question I: Ms. Sanchez has asked you to prepare Pro-forma Financial Statements for YVMDC for FY 2023. At the very minimum, a Monthly Cash Flow Budget (Exhibit 3). She would also like to present to Mr. Lowe proforma financial statements, i.e., a Statement of Financial Position (Exhibit 1) and a Statement of Activities (Exhibit 2).
Question II: Mr. Lowe is on board with YVMDC expansion plans. He, however, thought revenues and cash flow projections were overly optimistic. Specifically, he believes the expansion could result in delayed payments and a significant increase in charity care. He would like to see proforma Basic Financial Statements assuming a 20 percent contractual adjustment rate (up from 17.5 percent) and projections of collections assuming a 40 – 40 – 15 – 5 percent collection schedule (down from 50 – 30 – 15 – 5 percent).
DELIVERABLES
- Use the following Microsoft Excel template file (https://bit.ly/3Ze30fo) to prepare baseline a Monthly Cash Flow Budget, Statement of Financial Position, and Statement of Activities for FY 2023 (i.e., complete Exhibits 1-3). Save your file as LastName_Baseline.xls.Hint: Create a flexible spreadsheet and use that to respond to Question II.
- Prepare alternative Monthly Cash Flow Budget, Statement of Financial Position, and Statement of Activities for FY 2023, assuming the higher contractual adjustment rate (20 percent) and collections on receivables were 40 – 40 – 15 – 5 percent. Save your file as LastName_Adjusted.xls.
- Prepare a one-page memo summarizing the clinic’s operating position and financial performance under the two scenarios (You’ll need to prepare the Basic Financial Statements for YVMDC for FY 2023). Be sure to provide Ms. Sanchez with at least three strategies that would allow YVMDC to maintain liquidity and profitability. Where possible, simulate financial outcomes based on your recommended strategies. Save your file as LastName_Memo.doc. No PDF documents, please.