Why Is Financial Readiness So Important For Your Future Success
As the cornerstone of any strategic planning effort, financial readiness prepares Life Plan Communities to make decisions confidently, to accept reasonable risks and to invest wisely in future growth. It provides early warning of trouble, gets you to “yes” or “no” quickly and helps avoid unnecessary waste of time and resources.
For organizations committed to creating the Life Plan Community of the future, financial readiness is the foundation for innovation and expanding long-term impact.
Steps To Make Your Life Plan Community Financially Ready
Use current information to develop long-term understanding
Your current financial situation is inextricably connected to your long-term financial success. The goal is to expand understanding about how the current financial state creates the foundation for viability of existing operations and impacts your ability to make strategic investments.
What does the current situation reveal about your financial future? Are you gaining financial strength, treading water or losing ground?
Identify key drivers
Senior living organizations are complex, with many moving parts. But not all variables are equally important.
Isolating the key drivers of your business model— those factors that have the greatest impact on financial performance—enables leaders to focus attention where it makes the biggest difference.
Keeping projections at a high level provides useful directional information without getting bogged down in less impactful details. Focusing on the unique aspects of your business is a powerful step forward.
When financial information is distilled to its essentials, it becomes easier for all stakeholders— including those with less confidence navigating detailed financial reports—to understand, engage and contribute to decision-making. This clarity can foster alignment and accelerate action.
Aggregate activities
A baseline model of the organization builds understanding of your current strengths and weaknesses and serves as a foundation for projecting future strength or, potentially, future weakness.
To create a long-term, high-level picture of your life plan community’s business model, organize the total activities into major sources and uses of funds categories. This allows you to consider the individual components, including what each reveals about your operation and how each might be changed for overall improvement.
For many Life Plan Communities, this exercise highlights the significance of entrance fees within their long-term model, which immediately elevates the importance of actions geared to attracting new entrance fees.
Similarly, for many communities, charitable contributions will represent a comparatively small portion of future financial strength. Despite its potential for tax-exempt organizations, philanthropy is often an underutilized strategic advantage. Could your future plans direct greater effort toward improving either of these components?
Ultimately, this long-term aggregation of activities helps you understand if your financial position is improving over the envisioned period, and if not, what changes you can make. Can you adjust pricing, reduce costs and/or services, add programs or expand philanthropic efforts?
Add dimension to your ratios
Board and finance committee members view higher debt service coverage and days of cash on hand ratios (DSCR and DCOH) as good, particularly if the organization’s metrics compare favorably to peers.
Strong ratios and favorable comparisons provide governance teams with comfort relative to their fiduciary responsibilities. But how can you expand beyond this retrospective view to a multi-dimensional understanding of how total operational activities create the opportunity for future investments?
Agree on financial targets for your organization
While bond covenants define minimum requirements, agreeing on higher internal targets can help boards act confidently, knowing they have established guiderails to protect the organization’s future.
Once agreed upon, these organizational thresholds can provide clear and objective confirmation that future actions will not push the organization into a danger zone. And if the long-term model does show the organization failing to achieve the targets, you have runway to implement alternate plans.
Quantify capacity to invest
The major goal is to quantify resources available for future growth and investment, which we refer to as “capital capacity.” This involves understanding not just whether you can afford a new initiative, but how that investment will affect the rest of your operation, including financial stability and your core mission.
To calculate capital capacity, combine your internal operating targets such as DSCR and DCOH with your long-term financial projection. A Life Plan Community’s budget for future investment is the delta between the long-term value created and the established performance requirements.
Capital capacity serves as a barometer of what your community can spend—particularly for nonrevenue producing projects such as renovating healthcare space or expanding mission-related services.
Stress test dynamically
The ability to test the sensitivity of assumptions is also critical. By creating agility in the modeling of different scenarios, you can identify risks, opportunities and the impact of potential changes.
Directly addressing the “what ifs” is another key to improving confidence among all stakeholders. Identifying how much stress your projections can withstand and testing the sensitivity of key operating assumptions helps you understand the conditions and challenges that might make future projections unachievable.
You need to answer questions such as what changes to occupancy and rate—and in what combination—could jeopardize projected results? Or what increase to labor cost could derail future planning?
To do this, use a dynamic model that allows for assumptions to be changed and assessed individually—in combination with varying time periods.
Model your dreams
Once the foundation is laid, create a high-level model of your future plans—both through development and into operation.
Whether you’re considering new common space or the addition of independent living apartments or something else entirely, break the dream into its key components.
What are the costs (design, development, construction) involved in bringing this project online—over what period? What is the high-level budget for major revenue and expenses (number of units, projected entrance and monthly fees, labor)?
Integrating your dream’s model into the long-term financial projection provides a quick assessment of execution potential, which can significantly save time and planning resources. Are the plans go or no-go? Does the organization’s capital capacity allow for development of the project according to the planned timeline? If not, what actions can be explored to bring your dream to reality?
An integrated structure of projecting future results, establishing agreed performance requirements and testing sensitivities provides the ability to evaluate multiple or alternate projects and time plans. Through this process, your Life Plan Community leadership can build the shared confidence necessary to commit to plans worthy of pursuit and likely to be achieved.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader. For more information, visit CLAconnect.com.
CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, digital, audit, tax, consulting, and outsourcing services. CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal. com/disclaimer. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.
