Mountain Village Clinic

By: Anita Cung, Chanelle Truong,

Kelsey Wong & Vicki Wu

Background

Mountain Village Clinic is a small walk-in clinic next to the primary ski area of
Mountain Village, close to Aspen, Colorado.

● Clinic specializes in treating injuries sustained during skiing.

● Patient volume at the clinic is highly seasonal because of the vast majority of the
business occurs during ski season, which is generally during December through
March.
● Orthopedist James Peterson and internist Amanda Cook thought about closing
the clinic during slow months, but
○ (1) the clinic would be very difficult to operate efficiently only for a portion of the year
○ (2)the area has started to attract more summer visitors, which has made summer
operations more financially successful.
Background
Dr. Cook handles the financial work for the clinic; however, the clinic
recently hired Doug Washington to help with the tasks.

● Dr. Cook called Doug into her office to talk about cash
management services and the clinic’s line-of credit requirements.
○ Determine Mountain Village Clinic’s borrowing requirements for the first
half of 2010
○ Estimate the clinic’s line of credit requirements for the meeting with First
Bank
○ Create a cash budget from January to June 2010
 Introduction: Budgets
● Budgets are detailed plans, expressed in dollar terms, that
specify how resources will be used over some period of time.
● Used for planning, communication, and control
● Budgets may be developed and applied to any level within an
organization:
○ Aggregate
○ By department
○ By service line
○ By contract
○ By the nature of the expenditure
● To be effective, budgets must be thought of as managerial
tools rather than financial staff tools
Introduction: Line of Credit
● Definition: a short term loan agreement by which a bank agrees to lend a business
a specified amount of money
● In general, line of credit are used by businesses to meet temporary cash needs.
● The business can borrow against the credit line at any time it is in force (Usually
no more than a year)
● The amount borrowed on the line or some lesser amount can be repaid at
anytime, but any amount outstanding must be paid at expiration
● Lines of Credit are used by businesses to meet temporary cash needs, as opposed
to being used for permanent long-term financing
Forecast of Billing
Billings
COLLECTIONS DATA:“Daily billings
follow the 20 percent - 20 percent - 60
percent collection breakdown based on
monthly billings.

CASH BALANCE DATA:“The clinic has

to maintain a minimum cash balance of
$50,000 at First Bank because of
compensating balance requirements on its
term loan. This amount, no more, is
expected to be on hand on January 1, 2014)

VARIABLE COSTS: “These supplies,

which are estimated to cost 15% of billings,
are purchased two months before expected
usage. On average, the clinic pays about
half of its supplies in the month of
purchase (2 months before use) and the
other half is in the following month (1
month before use)
Billings
FIXED COSTS:

“During high season, these

costs run $150,000 a month,
but some of the clinic staff
work seasonally, so clinical
labor costs drop to $120,000 a
month.”

“The clinic pays a fixed general

and administrative expenses
including clerical labor,
approximately $30,000 a
month, while lease obligations
amount to $12,000 a month.”

“The clinic’s monthly

miscellaneous expenses are
estimated to be $10,000.”
Billings

VARIABLE COSTS:

The clinic has a semi-annual, five year,

10%, $500,000 term loan outstanding
with First Bank for which payments of
$64,752, are due on March 15 and
September 15.

Also, the clinic is planning to replace

an old x-ray machine (no salvage
value) in February with a new one that
costs $125,000.
 Calculations for Collections
● November month of sale: 150,000 x 20% = 30,000
● December month of sale: 250,000 x 20% = 50,000
● 1 month after sale: 150,000 x 20% = 30,000
● January month of sale: 350,000 x 20% =
70,000
● 1 month after sale: 250,000 x 20% = 50,000
● 2 months after sale: 150,000 x 60% = 90,000
 Calculations for Cost of Supplies

November supplies purchases: 350,000 x %15 = 52,500

○ 2 months prior to use: 52,500 x 50% = 26,250 January supplies purchase: 300,000 x 15% =
○ 1 month prior to use: 52,500 x 50% = 26,250 45,000
December supplies purchase: 450,000 x %15 = 67,500 ○ 2 months prior to use: 45,000 x 50% =
○ 2 months prior to use: 67,500 x 50% = 33,750 22,500
○ 1 month prior to use: 45,000 x 50% =
○ 1 month prior to use: 67,500 x 50%= 33,750
22,500
Calculations for Net Cash and Cash Surplus/Loan Requirement

Net Cash Gain/Loss: Collections - Total Payments = Net Cash Gain (Loss)

Cash Surplus or Loan Requirement: Cumulative cash - Target Cash Balance = Cash
Surprise or (Loan Requirement)
January Cash Budget
● Dr. Cook suggested that Doug should
construct a cash budget for January as a
test case
● Mountain Village Clinic will request a line
of credit of $50,000 to cover the
outstanding loans of January
February - June Cash Budget

● April is when the firm is cash positive on its own

● The maximum monthly cash shortfall occurs in June ($60,750)
● The maximum monthly cumulative borrowing balance occurs in February
($99,000 = $49,000 + $50,000)
Line of Credit Requirements:

Total Surplus: $420,119 Total Loan Requirement: -$171,753

At least $171,753 is necessary for the Mountain Village Clinic, since in Why is there a loan
January, February, and March had cash shortages. We recommend having requirement for Jan - March
a line credit of about $200,000 since it would be enough to cover any when those are the most
shortages, or unexpected expenses. popular months?
 Additional
Considerations
 Will the Clinic need to request a line of credit for the
period? If so, how big should the line be?
• Yes, Mountain Village Clinic will need to request $171, 753
• to ensure all expenses can be paid for and they adhere
to the loan term requirement (maintaining 50,000)
Dr. Cook believes that the surge in patient volume over the
forecast period will result in some cash surpluses, what
should the clinic do with these surpluses?
• ⅓ of surplus should go into a checking account
• So there is immediate access to funds when they’re needed

• ⅓ of surplus should go into short-term investments

• ⅓ of surplus should go into long term investments
 In the case of cash surpluses
Mountain Village Clinic may experience major cash surpluses during
certain months than others and the business can use this money to:

● Set up cash reserves (used for emergency situations)

● Invest in own business to improve operations
● Invest in programs to gain more customers
● Maximize capital expenditures
● Save money to start another business
 Dr. Cook is asking how the clinic might go about setting its
target cash balance when no compensating balance is required

● Essentially, it is best to keep money on hand

○ In case of an unexpected turn of events
● Since the $50,000 are on hand at the bank, the clinic is not considered
as a bad debt loss
○ It would be smart to keep the money there to receive the annual
interest %, and save the money for any unforeseen events
Thank you for listening!