Strategic Planning
Financial Plan Explanation
Grady's budgeting is done on an incremental basis. What this means is that the budget for next year will be based on the budget for last year, with adjustments for inflation, for changes in the payer mix, for strategic changes relating to the service offering mix, and for new facilities in the system, as well as new capital expenses.
Grady uses a cost-benefit analysis, which takes the form of net present value, as part of its decision-making criteria for capital expenditures. Grady is in the midst of a capacity expansion. Karkaria (2013) notes that Grady has a $74 million expansion plan for downtown Atlanta which will enhance its system capacity with respect emergency care, in anticipation of a spike in demand relating to the ACA, and to meet existing demand in the market that is yet unfulfilled.
Grady has sought financing for this project, including donations that can help to allow Grady to manage this expansion without adding significant debt. For example, Grady has acquired a $30 million award from the Marcus Foundation to put towards this expansion (Grady, 2014). By seeking out and receiving such generous awards, Grady is able to commit to these types of projects. Grady management certainly needed to have a contingency plan in case such a major award was not forthcoming, either in finding monies from other, smaller donors, or in borrowing the funds for the expansion.
3.
The capital budget is the area where Grady needs to do the most planning. When it budgets for existing operations, Grady expects to utilize existing revenue streams, both donors and payers, in order to help finance ongoing operations. Grady seeks to have at least a profit-neutral operation, wherein the operations would at the very least pay for themselves. This is often not the case, however. Government, at different levels, remains a major payer for Grady. In its latest annual report, Grady cautions that both the State of Georgia and Fulton County are threatening to reduce their levels of funding for Grady and for patients, in response to their ongoing budget issues. This is a significant concern for Grady, because these governments have significant bargaining power over Grady and can impose upon Grady payment levels. As a price taker, Grady is faced with a situation where its operating budget may be compromised.
Applying basic managerial economics, a large portion of Grady's costs are fixed, so it must accept any patient that results in payment higher than variable costs, as a means of earning contribution to fixed costs. Thus, Grady will still take patients from these governments, but will earn lower contribution levels from said patients, straining the organization's financial situation in the long run. While Grady was able to avoid the worst of the proposed cuts in this budget year, the threat of budget cuts in the future remains, and Grady remains a price taker. Future budgets will need to consider either the payer mix, or changes in operations in order to build better margins into everyday operations.
The capital budget is where Grady needs to raise funds, either through donations or borrowing, in order to finance capital costs. While there is the possibility that some funding can be acquired through different levels of government, it is uncertain how reliable that funding will be. For the most part, Grady has a very good community profile and that allows it to gain funding. The $30 million award will be a springboard for the rest of the financing -- once a major donation like that comes on board, the vote of confidence is recognized by other donors. At a certain point, Grady can find financing for any shortfalls on its capital projects, because of its ongoing revenue streams and its clear ability to gain win major donations. But capital budgeting is critical for Grady, because of its status as a not-for-profit entity, it will not be available to tap equity markets for financing.
4/5. The current business model for Grady is that the organization is a not-for-profit entity. It competes with premium positioning, meaning that Grady seeks to be the innovation leader in the Atlanta area, in its field of expertise. To do this, Grady has adopted a policy of making a high level of investments in new equipment and facilities. Simultaneously, Grady has a position where in it has a mandate to provide emergency services for the poor in the two counties, both of which provide funding for this work, along with the State of Georgia. These two mandates are seemingly mutually exclusive, because emergency...
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