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Revenue pressures and sinking margins: What should you do?

By William McDonald, on November 6th, 2019

In the wake of funding cuts, retroactive takebacks, and increased demands on amounts paid by insurers and government providers, now is a better time than any to evaluate an organization’s plan of attack to ride out short term operating blips or longer, more permanent funding decreases. These decreases in funding could negatively impact an entity’s ability to provide the desperately needed services to the designated end users. This entails taking a hard look at both the cash receipts and cash disbursement cycles.

Access to additional funds

One place to start is by evaluating existing resources on hand and determining your entity’s access to additional funds through borrowing, fundraising or stakeholder contributions. None of these three options are a permanent cure for ongoing operating deficits, but they willl allow for peace of mind and buy some additional time to make the needed operational changes to keep the organization healthy and stable into the future. Opening a line of credit or requesting access to higher borrowing limits when times are good are often wise choices as well. That way, funds can be available when the inevitable liquidity issues arise. Lenders are much more likely to extend credit when they feel the organization is on sound financial ground.

If your entity is one of the lucky ones that have a related party foundation, consider reaching out for a donation in order to fund operations until other measures can be put in place to normalize operations. If no related party foundation exists, research if grants exist from unrelated foundations or government entities to assist with short-term needs. On rare occasions, entities in financial distress will qualify for funding from government entities for providing services to underserved populations and communities. Community foundations can also be an additional resource for organizations to solicit donations. Get to know the resources in your area and don’t be shy about asking for donations or grant funding to support your mission.

Revenue enhancement

Next, consider where existing payment streams come from and determine the likelihood those streams will continue and at what levels. Organizations should have a plan to evaluate the complete revenue cycle and cash receipts process. As part of this plan, each entity should look at the frequency of billing and the resources allocated to collections that could speed up the cash receipts function. Consider third party collection assistance if lack of internal resources or internal policies and procedures have failed to make the desired impact on the turnaround time to collect outstanding accounts receivable balances. If done right, the benefits of the timely cash receipts and collection of accounts previously considered uncollectible can offset the additional expense of a third-party collection service.

Each entity should also weview underlying documentation to make sure the organization is getting paid appropriately. Errors in calculations when establishing reimbursement rates occur on a regular basis and it’s important to implement policies and procedures to fact check the underlying data and determine your entity is receiving the proper reimbursement amount.

Another avenue to pursue is the active involvement in industry and trade groups. These organizations often have the resources and political clout to push for action to restore or enhance reimbursement. The collective voice of many almost always carries more weight than a single entity pushing for reform. If all else fails, some organizations consider legal action to force the hand of external payers. The cost of such legal action is much more bearable when done as a group rather than as an individual organization absorbing the cost.

Operational expenses

Once all options for revenue enhancement are exhausted, it’s time to look at the expense side of the organization. Payroll and benefit costs are often the biggest expense an organization incurs. As a result, the flexibility and nimbleness an organization implements surrounding the evaluation of staffing levels is critical for long term success. Having a “Plan B” during emergency situations helps to determine the essential personnel needed for daily operations and allows for the entity to continue to serve the desired population. For example, it may make sense to analyze if your payroll and benefits are higher than the industry norms. If so, adjustments to the employer portion of health insurance or retirement matches may keep the organization afloat until operations can be stabilized. These are extremely difficult decisions to make, but payroll and benefit reductions must be considered when the only other alternative is ceasing operations.

An additional option for entities to consider related to expenses is to reach out to vendors and key service providers about existing payment terms. More often than not, vendors are aware of industry struggles and want to be part of the solution during a cash crunch. Another thing to consider is renegotiating contracts that are outdated and cause undue financial strain on the entity without providing the appropriate value in return.

Lastly, it may be worth asking the question, “Are there other entities in the same industry in a similar position that would benefit from economies of scale through collaboration or potential mergers?” Many industry types have gone through a consolidation of sorts where two or more organizations with strengths in certain areas fill their gaps or weaknesses by merging or acquiring another entity that offers resources or skills the original entity is lacking.

Unfortunately, there’s no one magic bullet to alleviate the pressures related to funding cuts and ever shrinking operating margins. Some, or all, of the items outlined above should be part of a much more comprehensive plan to reposition any entity during good times or bad.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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