The pandemic has posed a challenge in the context of supply and demand chain and cashflow impacting hospitals to a great extent. No patient means no regular inflow of cash. However, the costs or cash outflows continued. What could be done then?

Looking Into Financial Health During Pandemic

by Dinesh Chandra, Director-Finance, Compliance & Legal Affairs, Orbis
S Bhagyashree, Grants Manager, Orbis
Pawan Gupta, Accounts Officer, Orbis

As the country is gradually easing into the unlock phase, the role of finance teams has become more critical than ever-it would not be presumptuous to say that finance teams in the development sector are taking the lead in redefining objectives and strategies while also projecting the way forward.

Finance departments in organizations are involved in short-term tactical and long-term strategic changes that they have been managing during the lockdown period and have, in most times, acted as the catalyst to accelerate the transition to better cope with the uncertain times.

The COVID-19 pandemic has affected almost all sectors of the economy. Ophthalmology is no exception. The nationwide lockdown has led to pause in revenues for eye hospitals; in particular, the ones run by social sector enterprises are severely hit. The primary revenue source in an eye hospital is the various IPD and OPD services. The pandemic has posed a challenge in the context of supply and demand chain and cashflow impacting hospitals to a great extent. Due to lockdown – there is a complete halt of public transport systems—hospitals were instructed to shut down operations to curb the spread of COVID-19. No patient means no regular inflow of cash. However, the costs or cash outflows continued. What could be done then?

Given this background, Orbis has been making a roadmap along with other experts in its partner network to ensure continuum of care while maintaining the organization’s financial health. To discuss the situation, we turned to three of our long-time partners. Mr. Parvez Billimoria, Executive Director of HV Desai Eye Hospital (HVDEH), Pune, Mr. Amrik Singh, Head of Finance at Dr. Shroff’s Charity Eye Hospital (Dr. Shroff’s), Delhi and Mr. Sunil Khatua, Manager at VMA Netra Niramaya Niketan (VMANNN), Haldia in West Bengal.

We believe there is a way out and would like to share key coping mechanisms during the new normal.

Based on our interaction with our partners, we have broadly categorized the approach into a three stage Framework:

Counter, Adaptability and Application (CAA) – Framework

The framework is designed by grouping the experiences of partners. Being generic in nature, the framework can be applied on any small and medium size enterprise.

Stage I-Counter (React)

Although there have been no patients (hence no cash inflow), it does not mean that the costs disappear. Overhead still consumes a large portion of the cash available, no matter the case: staff must be paid, utility bills (e.g. water and electricity) still need to be paid, equipment need to be maintained, and so on. Add to that the recurring cost of personal protective equipment (PPE) as a result of the pandemic. All set ups which were recovering 100% of their cost in normal circumstances, now require to manage almost 100% of the cost from other sources. It is easy to overlook petty recurring costs of running a hospital, but they are very real and they add up quickly.

After the lockdown has been relaxed, it has posed a new problem of managing patients according to new SOPs, considering the “new normal”. In some cases, the hospitals were required to modify the OPD and IPD area, new hygiene practices, limiting the number of patients, social distancing etc. Hospitals were required to invest on converting their hospitals from “normal” to “new normal”.

Once OPD and IPD were given a go-ahead for reopening, for instance, Orbis partner hospital, Dr. Shroff’s Charity Eye Hospital, saw drastically low footfall of paid patients while they still continue to attend to normal quantum of charity cases (free and subsidized). The experience of VMA Netra Niramay Niketan (VMANNN), by contrast, was quite different. They managed to recover almost 50-60% of their costs. HV Desai Eye Hospital (HVDEH) also managed a fine act of balancing between their free and paid patients.

The hospitals have significant staff requirements to maintain and run the same. A major observation was that none of these hospitals had reduced their staff strength, although there has been significant reduction in cash outflow in the form of salaries. While VMANNN agreed on a differed payment plan with employees, the other hospitals opted for reduction in remuneration for the time being. In some cases, hospitals had to cap the maximum salary of staff members. Generally, all the hospitals divided their teams into two-three groups with alternate working days and reserve teams.

While a recovery process depends, a lot, on the organizations’ approach to counter the new normal which entails understanding the situation and assessing the current risks (to ensure employee safety and health), immediate crisis management actions are required to ensure the safety and health of the organization. The focus is more on the catastrophic effects on the organization, employee’s safety, suppliers and financial viability.

One forewarning here is to ensure the current solution should not be at the cost of long-term pain. In order to optimize outflows, organizations would need to take decisions with respect to the following:

  • Payment of salaries to employees: positions, trades and quantum.
  • Credit plan: negotiation with the hospital’s vendors and suppliers for a favourable credit period to ease out the continual financial challenges
  • Reduced utility costs: Some Orbis partner hospitals have closed a significant part of their hospital building. The operations of these hospitals are being conducted from areas which are absolutely necessary to do so.
  • Deferring earlier planned capital investment: Reducing the drain on cashflows by deferring any planned capital investments.

Revising cash flow forecast has assumed immense importance to cope with the new normal. It is very important that cash flow gap analysis should be done periodically, and corrective measures should be taken on time to revise the planning. What is important to note while taking such measures is to refer to the government guidelines and policies.

Through our interaction with the select partners, we can say that a well-planned and dynamic cashflow management strategy would ensure the financial sustainability of eye care organizations in this era of uncertainty.

Stage Ii - Adaptibility

Hospitals now need to adapt to the situation where they are required to work with reduced demand and supply. The stage is very important as one needs to maintain business operations despite ‘lockdown’ and ‘disruptions.’ The stage focuses more on the ability to alter operations during a crisis while ensuring the continuity of critical activities of hospitals.

In the above context, different Orbis partner eye hospitals came up with their unique way to counter the situation. The interesting finding was the areas in which they were located-one of our partner hospitals is in a metropolitan city, another is in a large and urban city and the third one is in a rural setup. It throws light upon the fact that there is no single panacea and requires leaders to find unique solution to overcome the obstacles. Organizations need to be more agile to counter and respond to immediate needs. However, despite the need for unique solutions, what we also acknowledge is the need for collaborative thinking so as to come up with a model which can actually benefit all the eye hospitals.

This stage also ensures the availability of a strong capital structure. The business is flexible enough to adapt according to demand in the current scenario. Also, all regulatory compliances are maintained.

  1. Resource rationalization: To be able to effectively rationalize service and resource offerings, health systems must first have a solid framework in place to support such an initiative. Creating such a framework requires four steps:
    1. Building cultural readiness
    2. Applying a transparent, collaborative process
    3. Prioritizing key opportunities
    4. Adhering to a well-developed implementation plan To effectively ensure the same happens, we need to be clear which are the areas where we can restrict resource utilization and where it can be augmented or expanded keeping community needs in mind. Resource rationalization also requires us to change our focus from the usual/traditional approach to what pertains to the current situation. The shift in focus helps enhance value through improved quality and reduced costs.
  2. Revisiting business plans and cash forecasts: It is important to relook at the business plans often in order to create an early warning detection system. The focus of such revisit should be:
  3. Debtor and Inventory Management: Hospital can survive lack of profits but cannot survive lack of cash flow. Management of Accounts Receivables is quite expensive. The main costs related with accounts receivables management are opportunity cost, cost of collection and bad debts. One of the most important aspect is the receivable from Third Party Administrator (TPA) in context of hospitals.

    Incorporating the balance sheet and cash flow in forecasting models is very important. Some of the models like rolling forecast and zero-based budgeting can be used. Optimum cash flow forecast should be for a minimum period of 13 weeks on a rolling forecast basis.

    The financial interpretation of Inventory Management is to minimize unproductive inventory and reduce inventory carrying costs.

4. Technology: Technology is part and parcel of modern-day business. COVID has been a great teacher in digital transformation and remote working. Critical finance and accounting functions had to be done virtually which poses a challenge for employees who could not be physically on-site with clients and teams.

The hospitals should look towards leveraging technology to move toward virtual processes, both internally and externally. Reviewing manual processes and controls and establishing a process to use digital tools to execute those tasks when possible is the best approach now. This requires that finance and accounting teams have remote access to key systems and data. Redesigning finance processes for remote accounting is key while also conforming to a robust close checklist with clear owners and dates.

5. Alternate Sources of Cash: Institutions have had to be more strategic and entrepreneurial and immensely creative in identifying new funding streams to shore up their budgets. The focus should be:

a. New Partnerships: An organization should look to build partnerships with other non-profits and the private sector in order to find ways to advance their mission

b. Identifying New Revenue Sources: Organizations actively look towards identifying new avenues through existing channels to generate new sources of revenues.

During our interaction, with the partners, the pharmaceutical shops had been the least affected by the lockdown. The fact is that organizations in rural areas utilize the opportunity, by offering diverse drugs from their outlay to generate the valuable cash.

Optical shops have been yet another source of cash inflow for hospitals in rural areas while the same cannot be said for hospitals in urban areas. After the lockdown was eased, the patients inflow has re-emerged at hospitals in rural setups while in urban areas the recovery is still very low.

Almost all the hospitals have vision centers, which has actually worked in rural setup to help hospitals with patient loads. Almost 30-40 patients were referred from these vision centers to hospitals. The vision centers were able to create a sense of safety for patients as they need not go back to the hospital again for follow-ups.

Stage 3 - Application

This stage can be characterized by applying the learning from ‘counter’ and ‘adaptability’ activities and continuing to adopt. The future state and services need to be anticipated. Now that we have discussed that the establishment of ‘new normal’ of demand and supply for the eye hospital, finalization of areas of adaptation and active implementation throughout the organization, we need to look at the practical application of the major activities which involve:

1) Cash Flow Monitoring: Cash flow forecast can help identify financial opportunities or risks and ensure that plans are heading in the right direction. Depending on the individual local economic situations of hospitals the cashflow should be monitored at least once a month. More frequent monitoring is advisable

2) Management of Working Capital and Cost Optimization: The primary purpose of working capital management is to enable organizations to maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligations. It is a business strategy designed to ensure that a hospital operates efficiently by monitoring and using its current assets and liabilities.

Cost optimization is a focused and continuous effort to drive spending and cost reduction, while maximizing value of each penny spent. It includes:

  • Negotiations with vendors for cost and the terms.
  • Standardizing and simplifying the processes and services.
  • Leveraging technology for seamless performance by the finance team adhering all the financial process.
  • Efficiently managing the compliance to avoid burdens of penal and legal actions against the organization and minimize risks that may arise when tight-fisted approach is adopted.

3) Turnaround Plans and Strategies: Turnaround management uses analysis to identify the reasons for failing cash crunch and rectify them. It involves management review, SWOT analysis and root causes analysis to determine situations. After the analysis, a long-term strategic plan and restructuring plan are created. One of our partner hospitals, has overtaken the management of optical shop (outsourced earlier) and another partner broadened the scope of its pharmaceutical shop by adding drugs for COVID care as well.

Sustainable Efforts as a Way Forward

Most of the organizations have exhausted their first set of cations in response to COVID – 19 – “low-hanging fruit,” i.e. to stabilize cash flow, increase liquidity and manage the activities in the pandemic situation. At the onset of the COVID -19 crisis, almost all the organizations acted fast to increase the liquidity. However, those actions are only temporary fixes. The task ahead is improving cash flow and implementing sustainable value creation.

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