Writing an Effective Capital Request Business Plan

March 2008 - Vol. 5 No. 3
But there seems to be a dividing line that many pharmacists either wish not to cross or feel that they cannot cross — and it leads to the use of business acumen and finance as a part of both their vocabulary and practice.  
Math and science should go hand in hand with the art of business and finance  in modern pharmacy practice. For instance, certain business and financial expertise is necessary to survive the ever-changing reimbursement environment. To aid pharmacists in honing their business skills, this article will explain the steps for writing a business plan to expand, add, or improve pharmaceutical services in a hospital setting.

Lee Iacocca once said, “Tell them what you’re going to tell them; tell them; then tell them again.” This is your mantra when writing your business plan. Following are projects for which we would need capital funding, and hence, a business plan:

    -Software for improved clinical programs
    -Increased clinical staff
    -An automated syringe filling device purchase   
    -Construction of a new IV room for outpatient chemo services

For this article, we will use the example of building a new cleanroom and treatment room for outpatient chemo services. The target audience who will have an active role in the decision process includes administrators, CFOs, financial analysts, nursing, IS, and pharmacy. As you can see, you will need to cover a variety of knowledge bases, and each discipline will need to understand what you are trying to sell and why you need capital funds. Use the tried and true KISS (Keep It Simple Stupid) philosophy of writing. Do not write a business plan as you would write a research paper. You need to keep all the parties interested in reading your plan, and if you make it too complex, they will stop reading after a few pages and toss it in the circular file or put it on the bottom of a pile of paperwork they will never look at again.

Getting Started
Break your business plan down into three distinct sections:
    1. Executive Summary: The “Tell them What You’re Going to Tell Them”
    2. Body: The “Tell Them” section
    3. Summary: The “Tell Them Again” section and your last chance to sell
        your idea
First, determine if your business plan is in line with your organization’s long-term strategic plan. If your organization requires the use of preformatted business plans that incorporate its mission, vision, and goals, use it or attach your written plan to the preformatted plan, as long as it addresses all of the requirements of the preformatted plan. There also may be IS implications that require an attached IS plan. Finally, you must understand the plan-approval process at your facility. The larger the organization, the more complex this process can be, so find an executive sponsor to guide you through the processes and champion your plan. At some institutions, executive sponsorship is required.

Executive Summary
The executive summary is the most important section of your business plan. A well-written executive summary enhances the chances that the reader will take you seriously and continue to read your plan. It should create a clear picture of the opportunity your plan presents.
For example, you want hospital administration to spend $1,000,000 to remodel your outpatient chemotherapy treatment room and cleanroom, as well as employ a full-time pharmacist and technician to oversee the clinical practice and preparation of the infusions. At your current off-site facility, nurses take the orders, prepare them, and administer them to patients. Your executive summary should focus on safety and improved patient care, stressing the importance of resource allocation. Although your research may have revealed the opportunity for increased net profit, make this the last consideration in the executive summary. Think safety, efficacy, and then cost.
Main Body
The main body of the business plan should contain the following sections, at a minimum:
Background   Clinical benefits    Process benefits     Financial analysis

In the background section, briefly explain some of the pitfalls and dangers associated with current practices. Use references to state the facts about the number of errors that could occur and the importance of making the proposed changes. Explain that the number of new chemotherapeutic agents available today makes this change important, and the critical monitoring of some of these powerful drugs is paramount to high-quality patient care.
The clinical and process benefits portions of the business plan require good marketing technique. Remember that part of your audience – RNs and pharmacists – can have great influence on your organization’s decision-makers and help you push your plan to the top. To market the idea of a new cleanroom for outpatient chemo services emphasize the following:
     -Improved patient care
     -More nursing time devoted to patient care
      -Increased clinical activity and involvement in patient care by pharmacists
     -Improved ability to decrease dosing and drug administration-related errors
     -Improved patient monitoring
     -Improved efficiency in IV preparation

After you have done your homework in marketing the plan to nursing and pharmacy, you need to present some financial justification for the remodeling and additional pharmacy staff to your administrators, CFOs, and financial analysts. In some cases, you could use cost avoidance related to decreased dispensing errors
or increased pharmacist interventions as a cost justification for a project. For outpatient chemotherapy services, there are some hard dollars you can look at to see if the project can pay for itself.

Use your outpatient services’ accounting system to calculate the current gross profit for the drugs dispensed and the average cost to treat the current patient load. Doing so provides valuable information on the future caseload that would be generated by any new business. In developing a cost justification for a cleanroom and treatment room for outpatient chemo services, the reimbursement data is based on payers and the number of J code medications dispensed to patients, and the projected costs are based on actual drug costs associated with  J code reimbursements.

Using an example of 28 patient visits per day, our projected gross profit is $1,973,300. We can then apply 20, 30, and 40 percent increases in volume to determine incremental increases in gross margin. A 20% increase in volume would only increase the patient load by 5.6 patients a day, while generating a gross margin of $394,660 annually. Exhibit 1 (click here to view chart) contains a simplified spreadsheet for performing these calculations. These numbers look very good, but you now need to present them to the CFO, administrator, and the financial analysts.
Your next step is to prepare a five-year income statement that summarizes the project’s financial performance over a period of time. Exhibit 2 includes a sample income statement. The revenue assumptions in this example are based on the gross margin percentages that we calculated in Exhibit 1 and represent the incremental increases in profit to the existing patient base. This example shows us that we would generate $1,659,622 in net profit over a five-year period. 

The next tool you can use to present your case to the CFO is called a “Payback Period” chart, which demonstrates that you can pay back the initial investment of $1,000,000 in three and a half years based on the net margins you have generated. In other words, the chart illustrates the amount of time required for an investment to generate cash flows to recover the initial investment. The sample chart below uses the net margins found in Exhibit 2.
Neither the income statement nor the payback period chart takes into account the time value of the investment. In other words, a dollar today and a dollar five years from now will have different values. So to determine the time value of your investment, you need to discount your future cash flows based upon your nets for the year, then subtract those discounted five-year net margins from the investment made today to determine the net present value (NPV) of our investment. To accurately calculate the NPV, ask your CFO for the correct discount rate to apply. This percentage reflects the current rate of return that the hospital
is making on its investments. The formula to calculate the discounted cash flows for five years is as follows: Net margin year 1/(1+r) + net margin year 2/(1+r)2 + net margin year 3/(1+r)3 + net margin year 4/(1+r)4 + net margin year 5/(1+r)5

Exhibits 3 and 4 provide examples with r values of 6 and 10%, respectively. To calculate the NPV, subtract the discounted cash flows from the cost of the initial investment. As a rule of thumb, an investment should be accepted if the net present value is positive and should be rejected if it is negative. From the examples provided, you will see that, as the r value increases, the net cash flows decrease. As with the projected growth rates or net margins, put together several scenarios before presenting the information to your CFO, in order to ensure you can defend the investment. The financial analysis should be the strong finish to the main body of your business plan and should blend with the safety, efficacy, and cost justification set forth in your marketing plan.

Much like the executive summary, a strong and succinct summary will emphasize the safety and efficacy that will be achieved with the changes you have proposed, outlining the financial benefits as a byproduct of the plan. I believe that quality within an organization will always improve its bottom line, and you need to believe it as well, if you are going to sell your plan to a diverse audience. In this section, you can also add a set of metrics for measuring your project’s success, such as: 

     -A patient satisfaction survey with baseline and post-implementation data
     -A nursing and pharmacy satisfaction survey with baseline and ongoing data           from the staff affected by the change
     -Financial measurements based on your NPV analysis

Pharmacists have long been recognized for their expertise in clinical matters, and those scientific skills can be practically applied to the planning needed for the expansion, addition, or improvement of your hospital’s pharmacy services. By following the basic rules outlined in this article, you can be successful in preparing, presenting, and selling your next pharmacy project business plan to all of the stakeholders at your institution. 

Rick Rosenfeld, RPh, MBA, is the executive director of pharmacy services for the ScrippsHealth Hospital System in San Diego, California. Prior to joining ScrippsHealth, Rosenfeld served as a consultant at Sharp Healthcare. Rosenfeld earned a BS with distinction in pharmacy from Ferris State University and a BA in chemistry from San Diego State University. He holds an MBA from California State University, San Marcos. Rosenfeld can be reached at rosenfeld.richard@scrippshealth.org.


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