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Modern techniques for forecasting in healthcare

Financial planning and analysis(FP&A) techniques and tools for the healthcare industry have come a long way in recent years. No longer is forecasting in healthcare reliant on outdated methods like static annual budgets. Today's intelligent FP&A systems deliver a dynamic and strategic toolkit that lets you optimize performance and quickly respond to changes and challenges as they arise.

Demand forecasting in healthcare

Whether you are facing:

  • Peaks and troughs in resource requirements,
  • New equipment demands,
  • Needing to update your outdated properties,
  • The cost of staff (retained vs. agency) and
  • Huge demand for consumables

Or a myriad of other growing challenges facing the sector today, you have to ask how you’re going to cover all these bases within the set budgets you have.

The reality is, for many healthcare providers, the pot of funds is nearly empty and charity donations, if we’re being generous, are ‘inconsistent.’ What this means is that the ability to forecast accurately and quickly is a primary imperative. Poor forecasting in healthcare = ward closures, staff shortages, and longer waiting lists.

Forecasting in healthcare

The good news is that modern FP&A teams, with the support of dynamic planning systems and better-connected data, power better decision-making and timely analytics. Integrating your FP&A into the decision-making process and modern FP&A techniques boost forecasts and your decisionsimpact and accuracy. But which methods work best for the healthcare sector, lets take a look:

Healthcare forecasting methods

1. Rolling Forecasts

Probably the most significant evolution in the FP&A planning process in modern times is Rolling Forecasts. A rolling forecast is a tool FP&A teams can use to make planning a continuous process that lives and breathes with the organization.

Where static plans used to last for a calendar year and then you’d develop a new one, rolling forecasts continue into the next period naturally, with FP&A setting the duration for usually rolling 12-month forecasts or quarter-by-quarter or month-by-month.

For forecasting in healthcare, this technique lets you see trends and build plans that anticipate changes in your external environment, plans that can be adapted quickly to meet these challenges.

To do this, the most critical step for a rolling forecast system is setting your forecast period length. The longer the period, the less accurate the forecast is likely to be. However, though more accurate, shorter forecasting periods require significantly more input and resource to be updated regularly. So, its about striking a balance that fits your organization.

The right forecast period for your FP&A team must consider the demands on your service, changes happening externally, and what resources you have available and when while accounting for expected and unexpected fluctuations. Theres no one-size-fits-all solution, and different healthcare providers will rely on different budgeting requirements and forecast periods.

2. Driver-based planning

Traditionally, financial forecasts were based on actual historical numbers, and organizations then added a growth target percentage from top-down strategic guidance. The problem is, this misses the story behind the numbers.

Yes, your financial statement reflects the interplay of a multitude of factors that affect your finances. The issue is, for accurate forecasting, you need more than just ‘the numbers.’ It’s also critical to identify the key drivers of your organization.

Now, before you panic that there are infinite factors that could affect what you do, its worth taking time to understand that a few key ones have the most influence on your results. To do this, many organizations use techniques like the Pareto principle (80/20 rule) to identify the top twenty percent of factors that influence eighty percent of the outcome. But there are other methods. Just find the right one for your team.

And remember, any forecasting you do then must use these factors and any uncertainties around them as their base. This helps you understand what you are planning for and see the story behind the numbersand how it impacts you and what you do in the future.

3. Scenario planning

The fluctuating world the healthcare sector faces today makes planning a complex exercise. This is made worse by how rapid these changes can happen, meaning not only are static long-range budgets almost useless, even shorter period forecasting with reasonable certainty is also becoming more challenging. So how do you do any planning?

How do you plan for the unknown? Well, the reality is, you’re probably already doing it. The pandemic is the best example of uncertain times we’ve probably all lived through. Right now, all FP&A teams across the world are struggling to build accurate forecasts for even the next month or quarter. There’s no clear consensus on when things will return to ‘normal’ or what normal will even look like in the future after this.

Managing this has made it essential that organizations plan for multiple scenarios without allowing bias, more commonly known as scenario planning.

However, to scenario plan effectively, you’ll need more advanced tools than many FP&A teams in the healthcare sector are currently using. Relying on spreadsheets, email, and manual data entry is no longer fit for purpose when faced with the current speed of change.

Working in these outdated ways is not only slow, but they also impede your data’s accuracy, collecting biases from the start. Effective scenario planning is only possible with tools that enable real-time data collection, which can project multiple scenarios using different trends and event modeling instead of simply relying on peoples best guesses.

4. Zero-based budgeting

One of the most common errors a budgeting process faces is the anchoring effect. This involves using a historical number as an anchorto build your forecasts and budgets. But doing this may have severe implications on what you predict. For example, when allocating cost budgets to different business units, the most critical factor is their potential to deliver future results, not their past performance.

If you continue to use past performance to allocate budgets, you may end up investing excessively in areas of your organizations that have already reached saturation. Adversely, it may also mean you’re under-investing in areas that have high-growth potential. To stop this from happening, you can use zero-based budgeting (ZBB).

ZBB means every area of your organization justifies its budget allocation, which returns to zero with every new budgeting period. For example, traditionally, most organizations use last years figures to justify this years. In contrast, the negotiation would be for a percentage increase or decrease in budget compared to the previous period. In contrast, a zero-based budget lets you allocate resources more optimally and frequently, based on your organizations needs at that moment.

With Unit4 FP&A, we can see over the horizon. Our planning insights are now all wrapped in one shared, accurate system. We can view previous budgets, track year-to-date spend, see forecasts for the coming year, and reallocate budget where necessary. Armed with these insights, the Ambulance Service can deliver a better, more efficient service across the East of England.

Robert Abery

Management Accountant, East of England Ambulance Service NHS Trust

Unit4 let you master these techniques?

As we did for East of England Ambulance Service, Unit4 FP&A lets your people use up-to-date planning, budgeting, and forecasting techniques and tools more effectively. Use cutting-edge solutions and powerful technology to drives effective and actionable insights and error-free reporting and execution. Uncover how our FP&A solution lets your organization effectively deploy the latest planning and forecasting techniques and processes; check out our solutionsproduct page or ckick here to talk to sales.

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