In healthcare, a financial feasibility analysis, also known as a financial feasibility study, helps determine if a business idea is sustainable or even attainable and if you should choose one investment over another. It is an essential step to venturing out with a new business and helps determine the financial feasibility of your plan.
A financial feasibility analysis examines the expenses of starting, operating, and maintaining the business; market and economic feasibility; expected return on investment (ROI); and expected liabilities. We’ll dive into the specifics below.
In this Article …
- Economic Feasibility: the cost/benefit of the project
- Technical Feasibility: hardware, software, facility systems impacting service
- Operational Feasibility: personnel, training, operating systems
- Schedule Feasibility: the ability to keep the project on-track
- Types of financial feasibility analysis
- Financial feasibility analysis reports
Economic Feasibility: the cost/benefit of the project
Economic feasibility covers most of the financial aspects of the financial feasibility analysis. It looks at profitability, start-up costs, operating costs, overhead costs, fixed and variable costs, and potential liabilities. This is best overestimated as unplanned costs are bound to happen. With start-up costs, prepare a budget with planned expenses for initiation.
If the money needs to be paid back, plan a payment schedule. Are there contracts that need to be established? Also, look at your assets to see if assistance is available to help with start-up costs. A sample financial feasibility study of a project may help you determine whether you are on the right track.
Other elements of economic feasibility include a financial summary, a projected statement of the financial position, an income statement for parties involved in the purchase, a cash flow statement, financial projections, and ratio analysis.
Technical Feasibility: hardware, software, facility systems impacting service
As any new hospital is set up, it requires specific software and hardware requirements to function, such as computers, testing and procedure machines, and EHR systems to maintain ePHI. To run said software and hardware, staff are required. Staff also need the proper training to operate the hospital equipment, and they might not have it yet. Here you will look at the experience of the staff you are acquiring and make sure the managers have the expertise and competency to sufficiently run their departments.
There will also be ongoing maintenance, updates, and support to run your technology. Because of continuing maintenance and updating costs, many businesses are switching to cloud-based EHR systems. Cloud-based systems do not impose as many ongoing costs as in-house EHR software installed on new computers and machines. Here is a checklist focused on a feasibility study for a Hospital.
Operational Feasibility: personnel, training, operating systems
Here you examine the day-to-day operating functions in the plan. You may discuss several items the plan’s reliability, maintainability, supportability, and sustainability. Do you have the support for your staff to be trained by other staff who are knowledgeable about the subject? Sometimes you need to bring in an outside consultant if your current team is not yet prepared. There will also be ongoing maintenance costs for the facility and equipment; those should be planned for as best as possible.
You need to ensure that your managers are fully supported in their roles and that you can support them continually. Another item to consider is ongoing training to remain compliant with local, state, and federal regulations, such as annual HIPAA training.
Schedule Feasibility: the ability to keep the project on track
As most plans go, there is a timeline involved. Make sure you have a clear deadline for when items need to be completed and stick to it. The healthcare market analysis changes as time goes by, so you won’t want to wait. The market is constantly fluctuating, and getting the analysis done soon ensures it’s as accurate as possible.
Types of financial feasibility analysis
There are several credible types of financial feasibility measures. These are a set of calculations based on estimates and assumptions of future revenue. Because these different measures are based on estimates and assumptions, there is room for error in the actual numbers you see in the future. A few of the more popular choices when creating a financial feasibility analysis are cost estimates, return on investment, payback period, and net present value.
- Cost estimates: Cost estimates are a way for project managers to forecast the costs and resources needed to carry out the planned project. Cost estimates break down the individual prices for items and give you a total amount required. The cost estimates are generally completed before the market and financial feasibility study is completed, and you may need to revisit those documents for reference. Business success is dynamic and needs to be re-evaluated on an ongoing basis. Cost estimates will need to be reevaluated periodically to stay on track toward your goals. The accuracy of the cost estimate varies based on the complete scope of the project definition. If items are missing from the report, you may need to add them to the cost estimate as they appear. This will make the cost estimate a revolving number that can help you investigate changes and determine how they will affect your profits.Cost estimates also include a detailed Basis of Estimate (BOE). The BOE describes assumptions, inclusions, exclusions, and estimates accuracy to help you make sense of the cost estimate percentage. If the forecast is inaccurate, you may not want to put too much faith in it. It may warrant a different financial feasibility measure or a repeat examination.
- ROI, or return on investment, is an approximate measure used to determine the probability of getting a positive return from an investment. This measure is a ratio comparing gains or losses to the investment’s cost. It can reach the return from single or multiple investments with great accuracy. The balance of the ROI is most often expressed as a percentage.You subtract the initial investment from the expected final return to calculate the ROI. Once that number is obtained, divide by the expected final return and multiply that number by 100. Because of the simple calculations, ROI is widely accepted and used for profitability measures.When the final ROI percentage is determined, a positive value equals a positive return over the investment amount. Alternatively, a negative value equals a negative return on the investment amount, meaning the investment will produce a loss.
- Payback period: A payback period is a great way to estimate the length of time it will take to break even on an investment. The payback period is simply the time it takes to pay back your investment in full. The main goal of creating a hospital is to help customers and the community, and you need to make a profit to develop the hospital and grow in the future.When you’re creating a payback period, the shorter the period is, the more attractive the investment will be to stakeholders. To determine the payback period, you can divide the investment by the projected average annual cash flows to find the time it will take to break even on the investment.A payback period can help you decide between investments. If the payback period is too long, you may want to investigate other options. One thing that the payback period does not consider is the time value of money. As time passes, the value of money changes, and it may have less value in the future than it does now. Because of the lack of accountability for the time value of money, many managers opt to use different strategies for calculating profitability, such as the net present value method.
- Net present value: The net present value is considered a superior method to the payback period. This is because the net current worth accounts for the time value of money, or how today’s money is valued in the future. Net present value is a more complex calculation than some others, and usually, managers use spreadsheets to help keep track of the measures. It is easy to access spreadsheets that calculate the net present value of an investment; there is even a function in Excel for it.To calculate the net present value, you need the current annual value of the cash flow projected for the hospital. You also need the discount rate related to how the funds are obtained. If the net present worth is negative, you are not in a good place with your plans. A negative net present value means the investment would hurt your company and its stakeholders. On the other side, a positive net current value indicates that the project will be successful in the long term. The larger the positive number is, the greater the benefit to your company and stakeholders.The net present value method is a more complicated calculation and maybe a little harder to explain to people than the payback period or other forms. But it has proven superiority over other methods as it fully considers the time value of money for your investment.
- Mitigating errors in calculations: These feasibility study calculations are based on estimates, assumptions, and market analyses. Because of the risk of errors, it’s important to consider a few ways to mitigate those errors. The first thing to do is to double-check your calculations. Having several eyes on the project is a must to find both minor mistakes and large ones.Once you’ve done the calculations and made your estimates, you can conduct a sensitivity analysis to help mitigate some of those errors. Reconsider a fixed-cost increase if a purchase is made at future prices. There should also be a level of variance in the estimates since labor and outside vendors change their prices with changes in supply and demand. Also, it would help if you rethought your projected returns. Projected returns are often overestimated and need to be a point of open conversation.
Financial feasibility analysis reports
A financial feasibility report is a great way to find new opportunities throughout the process of creating an account. A financial forecast and determination of financial feasibility for your hospital can create peace of mind and set you on your way to making that dream come to fruition. The financial feasibility study gleans information that may have been overlooked or missed without writing out the whole process.
Documents like a financial summary, a financial income statement, and financial projections can show how your hospital may compare to others in the market and prepare you for what is next. If you need to convince stakeholders to invest in the project, offering them a positive financial feasibility report with credible numbers like the net present value is a much more concrete way to convince them you have a successful plan.
A financial feasibility report is an excellent resource for your hospital development plan. Market and financial feasibility study information are imperative to predicting a successful business venture and determining whether that venture should be attempted in the first place.