Profit is Not a Dirty WordOctober 11, 2019
In recent years, we have seen an increasing number of not-for-profit skilled nursing facilities go on the market and sell to for-profit companies. Time and time again, we usually find that the root cause of this is that the facility took their categorization as “not-for-profit” too literally. For years, they operated on a break-even basis at best, or at a loss at worst. And in years when they did manage to make a profit, they had to apply that profit to pay off debt incurred during years of loss.
Contrary to what its name implies, a not-for-profit organization is supposed to make a profit. The difference between a for-profit and a not-for-profit organization is that the for-profit has shareholders, or owners, who receive a distribution of the profit according to their percentage of ownership shares. A not-for-profit organization is supposed to take their profit and re-invest the money into facilities, services and programs – rather than making no profit at all.
Let’s look at an example of where a lack of understanding of this concept led to a loss of a not-for-profit facility. St. Anywhere Senior Care operated a nursing home and community-based programs. For years, profit from the successful nursing home supported the community services which operated at a loss. No significant savings or investments were built up. Over the years, there was a depreciation of the building the nursing home operated in. The organization suddenly found itself with a nursing home that was no longer profitable because of reimbursement and market changes, the need to replace facility infrastructure like heating and air conditioning, and an aging plant that needed renovations to be competitive in an active market. Because they had not built up depreciation replacement funds and used savings to cover operational losses, they had to sell to a for-profit company that had access to capital to make the needed facility improvements.
To prevent a disaster like this in your organization, stop thinking of profit as a dirty word. Profit is necessary to sustain and grow your organization, and without it, your organization will die.
Planning for Sustsainability
Profit is key to organizational sustainability, but it requires considerable planning and some tough decisions along the way. Programs that are not profitable should be considered for elimination. This is not to say that a program cannot be unprofitable during a startup period, but there must be a ramp-up plan that is closely monitored to ensure benchmarks are met. Long-term investments must be funded to be utilized in connection with access to loans for the replacement of facilities and infrastructure as they age. Lines of credit or emergency savings need to be maintained to help an organization weather and adapt to emergencies or changes in reimbursement.
The annual budget is one tool for sustainability planning. It creates a framework for ensuring program viability. The organization also needs a longer-term investment plan and a multi-year capital budget for facility improvements or infrastructure replacement. An information technology plan is also needed to make sure the organization can afford the continued development of information infrastructure and cycled replacement of technology as it ages.
As a leader in a not-for-profit skilled nursing facility, you have a responsibility for stewardship of the profitability and long-term sustainability of your organization. Together with the governing body, you must ensure:
- The organization has an annual operating budget that creates a positive margin (profit) for each program, or a plan to make the new programs profitable.
- The organization has a savings and investment plan for short-term emergency access to funds, as well as for long-term replacement of depreciated assets.
- The organization has a three to five year budget for capital expenditures, including information technology.
Stay Tuned for Help
Beginning October 16, 2019, Grassi Healthcare Advisors (GHA) will offer a weekly podcast covering different components of your role as a steward of profitability for your not-for-profit organization. Joe Tomaino, CEO, hosts the series, which also includes featured guests. If you would like to subscribe to the podcast series or have questions about your organization's specific profitability challenges, please contact Joe at firstname.lastname@example.org.