How to start and run a hospital?
M3 India Newsdesk Jul 05, 2019
To address the increasing need for quality healthcare in India, private entities are investing to ensure affordable healthcare facilities. While setting up a hospital comes with its own set of challenges, keeping it running is an equally difficult task. In this piece, we will provide pointers on how to start and run a hospital.
Type of entity: The founders of the hospital have to agree on the kind of entity they want to start. An entity can be of anything—proprietary concern, partnership firm, trust, society, private limited company. The founders should make a decision based on the benefits and drawbacks involved in each type of entity, and not only by the registration cost.
Phasewise setup: It is advised to have the setup done in a phased manner as and when required, and to allocate the resources accordingly.
Sources of funds and their cost: Investments and funds come at a cost. Either they are funded through their sources or through borrowed funds—which attracts interest. The founders have to be aware of the options and take decisions accordingly.
Survey of the location: Location of the hospital is also critical. Accessibility by public transport will affect the footfall in the hospital.
Financial projections: The management should project financials and make proper estimates of incomes and various expenses. This will help achieve a clear image of what the financial position would look like including the quantum of funds that would be required and the cost of running the hospital.
Analysis of working capital: There would be a huge amount of capital that would be required in the initial stage for setting-up infrastructure and buying equipment. After initial startup, there is a requirement for a considerable amount of working capital for the running of the hospital. This would be in the form of administrative expenses, staff salaries, consultants fees, rent, consumables and other such things. Many hospitals plan only the initial stage of investment and are unaware of the following capital requirement.
Investment into assets and equipment: These can either be bought or taken on lease. The management has to decide whether to buy or to lease them depending on the revenue that can be generated using these assets/equipment.
Registrations and compliance: A business requires various registrations and statutory compliance, depending on the nature of the entity. Also, regular filings of returns have to be complied with, as there are huge penalties and fines for non-compliance.
Pricing for the services: The pricing is usually done based on the prices charged by similar hospitals in the locality. However, it is highly advisable to work out your pricing.
Sales/service records and reconciliation: Full records have to be maintained for the various services provided, and the amounts collected in cash and through the bank. Proper reconciliation has to be done to ensure the amount received is matching with the number of services provided.
Investment into inventory and its control: Inventory/stocks can be held for various purposes like retail, consumable commodities for treatment of patients. Inappropriate investments in inventory can end up in a cash crunch. At such times, liquidating stocks immediately becomes difficult. To keep control of the inventory, proper inventory records to be maintained to ensure availability of required stocks.
Inventory management also ensures:
- Buying the right quantity of stocks while keeping in mind that overbuying can result in blockage of funds, and a shortage can prove costly during the time of need
- Avoid theft by staff
- Reduce stock holding costs by investing in the right quantities
Accounting: A robust accounting system brings in transparency and provides accurate information on day-to-day business operations. A sound accounting system is also required for tracking payables and receivables. The management should insist on bills for every purchase made or expense incurred. A proper accounting system records and controls ensures that data is not manipulated. It also ensures that the staff is not misusing funds or revenue.
Control of costs: The management has to work on the costs and analyse the cause for higher costs and bring in control, as every one rupee saved would mean ten rupees of sales made. Hence, cost analysis and cost-saving techniques help increase the margins.
On top of all this, quantitative records of all sales and services have to be maintained. Proper policies and Standard Operating Procedures (SOPs) have to be formulated and updated from time to time.
This article is part of a series on hospital/clinic set up and management. Click on the links below to read them.
Santosh Kalburgi has worked with ITC, Myntra and Bosch before starting his own firm in 2014. He has also handled finance of several private hospitals in Bengaluru.
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