Financial Projections, the Firm’s Growth Strategy

📄 Words:	1174
📝 Subject:	Financial Management
📑 Pages:	7
✍️ Type:	Essay

Benchmarking
Pro-forma income statement
Projected cash flow
Personnel plan
Forces that determine the profitability of the industry
Challenges facing the industry in its operation
Growth strategies
References

Benchmarking

The business concept of Helpful Health Care Consultants, LLC proves to be a feasible investment opportunity. According to Patti (2009, para. 1), it is paramount for firms in the healthcare industry to integrate the concept of benchmarking. Benchmarking involves a method of measuring the performance of a firm within the industry. This can be attained by conducting an analysis of the current and historical data in relation to the firm’s competitors and other industry leaders. Through benchmarking a firm is able to formulate effective strategies and other healthcare projections. In the United States, all firms in the healthcare industry are required to integrate the Best Practice (BP) standards. The standards enable the firms to increase efficiency, reduce the cost of operation and enhance the quality of service provision. In the healthcare industry, there are a number of benchmarking services that are integrated into evaluating industry performance by considering various elements. For instance, about financial performance, organizational benchmarks are formulated by considering the key regional competitors and industry leaders. In the United States, American Healthcare Solutions have effectively integrated the benchmarking concept in its operation (Patti, 2009, Para. 3).

Pro-forma income statement

Due to the high growth potential of the healthcare industry, the firm’s management team has made a projection in relation to the firm’s future growth. The table below illustrates the firm’s projected Pro-forma income statement for the first three years of its operation.

Items	Year 1 Amount in $	Year 2 Amount in $	Year 3 Amount in $
Total receipts from consultancy	750,600	800,000	900,000
Direct sales cost	200,000	190,000	210,000
Another cost of sales	50,000	64,000	69,000
Sales total cost	250,000	254,000	279,000
Gross margin 500,000 546,000 621,000
Gross margin in %	66.62%	68.25%	69%
Expenses Cost of labor	80,000	85,000	100,000
Cost of promotion	150,920	160,000	165,000
Cost of premises depreciation	42,300	45,000	48,000
Rent	15,400	15,400	15,400
Office stationeries	55,000	45,000	45,000
Insurance	56,000	56,000	60,000
Total operating expense	399,620	406,400	433,400
Profit before interest & tax	100,380	139,600	187,600
Earning before, interest, tax & depreciation allowance.	70,000	240,000	245,000
Cost of interest expense	10,000	8,000	5,500
Cost of tax	7,500	50,000	55,000

Projected cash flow

In its operation, the firm’s management team has projected a positive cash flow. However, the first year of its operation will be characterized by a fluctuation in its level of profit which will culminate into negative cash flows. This trend is expected to be reversed in the future with the firm experiencing an increment in its profit level and hence the cash flow.

Item	Year 1	Year 2	Year 3
Cash sales	470,000	650,000	690,000
Cash from receivables	150,000	200,000	250,000
Total from cash operations	620,000	850,000	940,000
Other cash received
Sales tax& VAT received	40,000	52,000	55,000
Total cash received	667,000	902,000	995,000
Expenditures Operation expense
Cash spending	80,000	90,000	100,000
Payment on bill	630,500	570,500	640,000
Total on operation	710,500	660,500	Another
Other cash spending
Sales tax & VAT paid	0	0	0
Principal paid on current borrowing	7,000	0	0
Additional liabilities on principal payment	0	0	0
Principal payment –long term liabilities	22,500	23,000	24,000
Purchases on other current assets	0	0	0
Purchase of other long term assets	0	0	0
Total cash spent	740,000	683,500	764,000
Net cash flow	(73,000)	218,500	231,000

Personnel plan

In its operation, the firm will also incur a considerable cost in remunerating its human capital. It is expected that the personnel cost will increase across the 1^st to 3^rd year. This will result from an increased commitment by the firm’s management team to motivate its staff through good remuneration packages. The table below illustrates the forecasted personnel costs.

	Year 1 Amount in $	Year 2 Amount in $	Year 3 Amount in $
CEO	45,000	50,000	55,000
Vice President	40,000	43,000	45,000
Other employees	100,000	130,000	130,000
Total expected payroll	195,000	223,000	230,000

Forces that determine the profitability of the industry

According to Porter (1980, p. 35), the profitability of a given firm is affected by the industry structure which is determined by external forces. The profitability of firms in the healthcare industry is affected by the external environment. For instance, an increment in the rate of technological growth is greatly contributing toward the industry growth. This is because growth in information technology is enhancing the efficiency with which healthcare consulting firms are executing their duties.

The profitability of the industry is also determined by the extent to which firms in this industry have incorporated the concept of value addition through innovation. Innovation plays a significant role in ensuring that healthcare customers attain their desired utility levels (Ireland, 2008, p.56). Firms that are innovative in their operation are at a high chance of attaining a high level of profitability.

In addition, the profitability of firms in the healthcare industry is affected by the extent to which the firms have integrated strategic management in their operation. Strategic management enables the firms to be proactive in implementing changes that occur in the environment (Hagland, 1996, p2).

Challenges facing the industry in its operation

Currently, the healthcare industry is being faced with an increment in the degree of competitiveness. This results from the fact that more investors are venturing into the industry due to its profit potential. Porter(1980, p. 35) asserts that as more investors enter the industry, the degree of rivalry increases culminating in a reduction in its profit potential as firms compete to gain a high market share. In addition, the industry’s profitability is being affected by an increment in the number of mergers and acquisitions being formed. The large healthcare consulting firms are acquiring the smaller firms in an effort to position themselves more optimally.

The global economy is also presenting a challenge to the firm. Despite the increased health-conscious nature of the consumers, demand for healthcare is declining due to the effects of the financial crisis. This is associated with the fact that the consumer’s purchasing power is reducing. The global economic crisis also presents a challenge to the survival of the healthcare industry. This is due to the fact that the crisis has resulted in a reduction in credit availability from financial institutions.

In addition, the legal environment is negatively impacting the healthcare industry due to its volatile nature. Various governments such as the US are undertaking the reconstruction of their healthcare systems. This poses a risk in the operation of firms in the healthcare industry.

Growth strategies

The growth of the firm is an important element in ensuring that the firm survives in an environment characterized by intense competition. To be able to survive in the long term as a going concern entity, the firm will consider integrating the Greenfield investment concept. This will entail the firm establishing outlets in different geographical areas in the US. As a result, the firm will be able to cover a wide market.

The firm’s growth strategy will also entail the incorporation of the concept of internationalization. Internationalization will be achieved through integrating electronic commerce. This will be possible since the firm will be dealing with digital products.

References

Hagland, M. (1996). Eight critical success factors will help your healthcare business. Web.

Ireland, R. (2008). Entrepreneurship: Successfully launching new ventures. Upper Saddle River, NJ: Pearson Prentice Hall.

Patti, M. (2009).American Healthcare Solution. Web.

Porter, M. (1980).Industry structure and competitive strategy: keys to profitability. New York: The Free Press.