In today’s challenging healthcare environment, many well intentioned projects proposed both by supplier partners and facility managers go unfunded. Many times, the rejection of funding is not because the project did not have merit. With hospitals having limited capital funds and a multitude of valid projects in need of funding, many worthy projects never get off the ground because they were not proposed with the proper attention to the metrics and detail that CFOs look for. Knowing these metrics and using them in a funding proposal can help increase the chances for funding.
Many of today’s healthcare proposals use a simple payback metric for justification. This simplistic formula can catch a CFO’s eye if the proposer is fortunate enough to have a payback of less than one year. This falls within the “no brainer” guidelines for many health systems. But many worthy projects that have true value fall outside this guideline and require a more creative justification. One method that is very effective in the healthcare field is converting a bottom line savings figure into an equivalent top-line revenue figure. The very low margins that hospitals and healthcare facilities operate within make this approach particularly effective. Consider an example of an Energy Management project with an annual savings of $100,000. If you assume an average margin for a hospital of 3% (quoted in a study presented at the Region 6 ASHE conference this year), that $100,000 in savings becomes equivalent to $3.3 million in revenue. I believe that figure will catch a CFO’s eye more than the savings figure.
Another metric that can be creatively used to get projects approved is rate of return. Consider a Building Automation System (BAS) upgrade project that will cost $200,000 up front but will provide $100,000 per year in savings. A simple payback calculation of 2 years might not move that project to the top of the list, but a rate of return calculation shows the project in a different light. There are many free rate of return calculators on the internet, and running a calculation on rate of return over five years ($200K invested, and $500K in savings over five years) produces a 20.11% Compound Annual Growth Rate (CAGR) return. It is doubtful that many hospitals have a portfolio of investments that is making 20% per year, so this BAS project should be an excellent use of the hospital’s money.
A little extra time and understanding of these financial principles can help get your project approved in a challenging and crowded healthcare funding environment. Which of these financial metrics will you use? Let us know in the comments!