Question 1 (20 marks)

The Bondi Junction Medical Centre is a 3-doctor general practice. The doctors want you to prepare a cash budget for the first 3 months of the year – from January to March.

They have given you the following information.

Opening bank balance: on 1 January there was $8,500 in the centre’s bank account.

Salaries. Two receptionists will be employed in the centre with total monthly salaries of $6,000. The doctors are each paid $12,000 per month.

Monthly operating expenses. Monthly mortgage repayments are $3,000. Insurance for the year will be paid in January and this will be $5,000. Cleaning the centre costs $500 per month. Other office expenses such as stationary, postage etc cost $100 per month.

There is a quarterly phone bill due to be paid in January of $1500 and a quarterly electricity account of $2,500 due to be paid in February. The three doctors are also on mobile phone plans which cost $100 per month each. Total car lease costs for the 3 doctors are $10,000 per month and motor vehicle running costs are

$1,000 per month.

In February, the doctors are planning to buy new medical and office equipment and this will cost $85,000 which they want to pay in cash.

Patient fees.
The centre has 3 types of patients: bulk-billed patients, non-bulk billed patients and non-Medicare patients.

1.       The centre bulk bills 60% of the consultations and is paid $40 for each consultation by the government.

2.       Another 30% of the consultations are not bulk billed and patients are charged an out-of-pocket fee of $30 – the centre also receives $40 from the government for these consultations.

3.       The other 10% of consultations are for non-Medicare services such as life insurance medical examinations and the centre charges $150 for these consultations.

For entirely bulk billed patients, the centre receives the government payment in the month in which the consultation is performed.

For non-bulk billed patients – the patients pay their contribution ($30) at the time of the consultation and the government’s payment is received in the following month.

For non-Medicare patients – their payment is received in the month after the consultation.

Payments. All salaries are paid in the month in which the services are performed. Cleaning, office expenses and the mobile phone bills are paid in the month the services are received.

Patient activity. The total number of patient consultations expected for the period is:

December (actual figures)
1,100
January (forecast)
1,000
February (forecast)
1,300
March (forecast)
1,200
Required:
(a)        Prepare a cash budget for each month for the January to March period. (5 marks)

(b)       The doctors want to know whether they will be able to pay cash for the new equipment in February or if they will have to borrow money. If they need to borrow, how much will they need to borrow? They also want to maintain $8,500 in the centre’s bank account – so you need to take this into account when determining how much they will need to borrow. (2 marks)

(c)        A new GP practice is expected to open in February in the same street as the Bondi Junction Medical Centre and this clinic will bulk bill all its patients. If the Bondi Junction Medical Centre bulk billed all its patients – but not the non-Medicare patients which would still be charged $150 per consultation – what impact would this have on the Centre’s cash flow and how much it would need to borrow to finance the purchase of new equipment? (5 marks)

(d)       Write a report to the doctors summarising the expected cashflow for the first 3 months of the year and whether they will need to borrow money to pay for the new equipment and how much they would need to borrow. Also, analyse the financial impact of the new GP practice which is opening up. Outline the potential impact this new GP practice will have on the Bondi Junction Medical Centre’s cash flow and how much they would need to borrow etc. What advice would you give these doctors about the financial future of their medical centre? (8 marks)

Question 2 (10 marks)
Strathfield Day Surgery Centre will be opened for the first time on 1 June 2018 and is developing an operating budget for the month ending June 30, 2018. The Centre expects to perform 80 surgical procedures during the month. There are 2 types of procedures.

Procedure 1 patients are charged $4,000 and the cost of surgical supplies for these patients is expected to be $800.

Procedure 2 patients are charged $5,000 and the cost of surgical supplies for these patients is expected to be $3,500. The budget forecast is for 40 Procedure 1 patients and 40 Procedure 2 patients.

Strathfield Day Surgery Centre also contracts with orthopaedic surgeons at a fee of

$1,500 per surgical procedure – this is the same whether they perform procedure 1 or procedure 2. The monthly salaries for the Centre’s receptionist, bookkeeper, and two surgical nurses total $20,500.

The Centre’s occupancy costs, which include rent, insurance, and all utilities, are expected to be $18,200 per month. Average monthly communication costs are estimated to be $1,200.

Office and operating room equipment was purchased in May 2018 for $240,000 and paid for in cash on 15th June 2018. The equipment is expected to have a five-year life and has no salvage value. So depreciation is $4,000 per month.

All patients pay their fee prior to the surgery and the doctors are paid in the month after performing the surgery. All other costs are expected to be paid in the month they are incurred.

Required: (a) What profit or loss is expected for the Surgery Centre for the month of June 2018? (2 marks)

(b)The actual results done on a cash basis for June 2018 were:

Strathfield Surgery Centre Cash flow statement
June 2018

Revenues

Expenses
$210,000
Doctors Fees
$0
Surgical Supplies
$104,200
Salaries
$20,500
Occupancy costs
$24,000
Communication
$4,200
Equipment
$240,000
Total Expenses
$392,900
Net Cash flow
($ 182,900)
Naturally the doctors who own the Centre are confused because the actual figures are so much different to the budgeted profit figures. Write a report to the doctors explaining why the numbers are different. You are told that in June there were 25 Procedure 1 patients and 22 Procedure 2 patients.

They want to know how many procedures would need to be performed to make a monthly profit on an accrual basis of $20,000. The doctors also want your advice on the current pricing and costing structure of the Centre. (8 marks)