BUSM4154/4344: Financial Analytics For Managerial Decisions - RMIT University - Young Hills Podiatry Pty Ltd - Ms Annie Young - Case Study Assessment Answer

Subject Code: BUSM4154/4344 Internal Code: F_AI_EJIB_FG

Case Study Assessment Answer

Assignment Task: BUSM4154/4344 Young Hills Podiatry Pty Ltd Introduction – Ms Annie Young – Podiatrist It is June 1, 2019, Ms Annie Young, who is 30 years old, resides in one of the Australian capital cities. She is an accomplished athlete and a registered podiatrist.  Podiatry is a medical science that is concerned with health issues of the feet and lower legs. A podiatrist’s work involves prevention, diagnosis, treatment and rehabilitation. Conditions that these health professions treat include those from bone and joint disorders such as arthritis and circulatory disease arising as a complication of diabetes. They also diagnose and treat  skin and nail disorders, corns, calluses and ingrown toenails. Foot injuries and infections gained through sport or other activities are also diagnosed and treated by podiatrists.  On graduation, at age 23, Ms Young took a salaried position as a podiatrist with a community health centre in a suburb of her home city. She recognised that she needed solid experience in treating patients and wanted to work with senior professionals who would help her develop her skills. At this clinic Ms Young treated mainly people aged 60 and above. This age group tends to need the services of a podiatrist more than younger people. After 3 years in this position, she took a salaried role with a sports medicine clinic as the podiatrist treating sportswomen and sportsmen who attend this clinic. Playing sport at a senior level can put a great deal of pressure on a player’s feet and hence there is a need for skilled treatment. She has been with this clinic now for four years. She now thinks about running her own business. Setting Up of Young Hills Podiatry Pty Ltd Ms Young has been preparing to set up her own podiatry business since January 2019. Her aim is to run a general podiatry clinic, serving any patient who asks for an appointment. She engaged the services of a small business advisor and has been managing her money according to a strict financial plan. She is also a member of the Australian Society of Podiatrists and has sought advice on professional practice as a potential sole practitioner. Her clinic will be sole-practitioner i.e. Ms Young will be the only podiatrist working in the business. Ms Young’s parents live in the same capital city that she does, in the suburb of Pleasant Hills.  Several years ago Ms Young’s parents finished paying off their mortgage on the family home where they raised their four children. However, all four children have moved out of this home, and thus there are some rooms in this house that are not really being used. This residence is situated across the road from a carpark that serves the Pleasant Hills shopping centre. The suburb of Pleasant Hills does not have a podiatry clinic at present. Pleasant Hills used to be a suburb where  young families made their home, but now the majority of the population are people aged 55 and above. Most households consist of just a couple, or a single person. The age profile of the residents suggests that there will be many potential clients for a podiatry clinic. The design of the Young family home is on two levels with two entrances, one upstairs and one downstairs. The downstairs area is most suitable for a sole-practitioner podiatry clinic. Ms Young had discussions with her parents, who, assuming local government approval could be secured for a podiatry clinic in this location, agreed to carry out some small renovations to make the space suitable for the clinic. Ms Young’s parents agreed that they would finance these renovations, with Ms Young paying rent to them for the use of the premises. By the end of June 2019, local government approval has now been gained and the renovations to the family home are nearly completed. The clinic will consist of a reception area, a treatment room, a preparations area and bathroom facilities.   Ms Young has now completed all legal processes to set up her business as a limited proprietary company,  with Ms Young being the only shareholder. The name of the company is Young Hills Podiatry Pty Ltd, and it will trade as Young Hills Podiatry. All initial registration requirements for operation have been met and the first clients will be treated at the premises at her parents’ home  on Thursday July 4, 2019. Although Ms Young is still working at the sports podiatry clinic, she has been devoting time after this work to contacting local general practitioners (GPs) and  physiotherapists, letting them know of the coming availability of her services. Ms Young has given notice to the sports podiatry clinic, with her final day there being Friday, June 28, 2019. Ms Young understands that it may take quite a while for her to build up a busy practice and so she has arranged some sessional employment for herself on Tuesdays and Wednesdays. These wages will be paid directly into Ms. Young’s personal bank account, and cannot be considered as cash flows or revenues for Young Hills Podiatry Pty Ltd. Ms. Young will use her wages for her own living expenses, and, at least for the 2019 -2020 year,  will not take out cash salary or other cash drawings from Young Hills Podiatry Pty Ltd.  She intends to be available for client sessions in her clinic on Mondays, Thursdays, Fridays and Saturdays. Financial and organisational details for Young Hills Podiatry Fee payment arrangements for individual clients seen at the Young Hills Podiatry Clinic. Each treatment session provided by Ms Young at the clinic in Pleasant Hills will be for 30 minutes. The fee for each 30-minute session will be $80. It is estimated of half of the clients will be self-funded and will pay cash immediately. It is expected that 30% of clients will hold health insurance with Better Health For You (BHFY), a private insurance company. For these clients, BHFY will pay $50 of the fee.  Ms Young will eventually invoice BHFY for its contribution and will receive, on the day of service,  $30 co-payment from the client. Ms Young will invoice BHFY in the month after the provision of the service, and will receive cash from BHFY in the following month. Thus, for example, for services provided in September 2019 to clients with BHFY insurance, Ms Young will invoice BHFY in October 2019 and receive payment in November 2019. The Australian Government has a medical scheme in place where some people with particular health issues are able to have subsidised podiatry treatment. For such people, the Australian Government contributes  $55 for each 30 minute consultation and the person receiving the treatment pays any residual amount. Ms. Young estimates that 20% of her clients will receive this subsidy. Each of clients will need to pay Young Hills Podiatry $25 on the day of treatment. The responsible government department will forward its portion of the fees on a quarterly basis. Ms Young will invoice this department at the end of each quarter, and expects to receive the cash within six weeks of sending the invoice. Thus, for example, for services provided in the first operating quarter of the 2019-2020 year (i.e. July 2019 – September 2019), Ms Young will forward the invoice on the last day of September 2019 and will receive the funds in November 2019.   It is expected that the mix of clients i.e. BHFY clients, government supported clients and all other clients, will be the same every month. All clients will pay i.e. there will be no bad debts.  Ms Young’s salary rate in other practices has been at around $34 per hour (i.e. $17 per 30-minute session) and she estimates the labour cost of running the clinic should be based on the same rate.  Furniture and Equipment Ms Young needs to provide furniture and equipment for Young Hills Podiatry. Ms Young has been investigating ways in which to purchase these items and she now intends to order a specialist client chair, cupboards and benches, reception area furniture and specialist podiatrist equipment in mid-June.  The cost of these items will be $13,200, with payment needing to be made on July 1 when the items will be delivered. The depreciation for these items is straight line over 10 years. She will also place an order for a computer and printer for the business later in June. The cost of these items will be $3,600, to be depreciated over 2 years. Payment for these items will also be made on July 1 when the equipment is delivered and installed. Arrangement for the Sterilisation of Tools  In every podiatry session, the podiatrist uses various items of equipment such as tweezers, scalpels, nail clippers and scissors. It is essential that, for each client, the equipment is sterilised. There are two ways that this equipment can be sourced for a podiatry practice. The first is that the podiatry business buys a steriliser and sufficient sets of equipment for the number of patients. In most practices, there will a daily session of sterilisation of sets of instruments. The other way of sourcing the sets of instruments is to use a sterilisation service. Using this method, an order is placed for the number of sets needed for the coming week. These sets are delivered in time for the first clients on the Monday of each week and at the same time, the instruments used in the previous week are collected. These items of equipment are owned by the sterilisation service. Ms Young has decided to use Reliable Podiatry Sterilisation Services (RPSS), rather than buy a steriliser. The cost per package of sterilised instruments is $4. She will review this decision at the end of June 2020. Sale of therapeutic footwear For people with ongoing problems with their feet, there is therapeutic footwear available that can help their situation. Two types of such footwear are no-compression socks which are particularly useful for diabetic clients, and orthotic sandals which help restore natural foot function. After discussion with an advisor from Australian Society of Podiatrists, Ms Young intends to stock both these products. Ms Young has also been advised that it is sensible to always have some stock available for clients, and to make sure that both the socks and sandals are displayed attractively at all times. Operational matters Young Hills Podiatry Pty Ltd  will pay Ms Young’s parents $750 per month rent. Her parents will pay for all electricity, water and local government charges. This arrangement will be reviewed at the end of June 2020. This rent will be paid in advance on the first Monday of each month. For example, the rent for July 2019 will be paid on Monday, July 1, 2019. Young Hills Podiatry’s communication expenses (internet, telephone) will be $150 per month, to be paid in the month after the service is provided. Thus, for example, $150 will be paid in December 2019 for internet and telephone services provided in November 2019. Ms. Young has already organised this service and is using it now, and so $150 will need to be paid in July 2019 for the service provided in June 2019.  It is essential that Young Hills Podiatry Pty Ltd has adequate insurance. Fortunately, Australian Society of Podiatrists provides group insurance to its members at very reasonable rates. The policy offered covers professional indemnity insurance, public liability insurance , and building and contents insurance for the clinic. The cost of this insurance for the period July 2019 to December 2019 has been quoted at $900 (i.e. $150 per month), but must be paid in full by the end of June 2019. It is expected that the cost for insurance for the period January 2020 to June 2020 will rise by 2.5%, and this insurance will need to be paid for in December 2019. There are supplies that are needed for client treatment in a podiatry clinic such as cotton wool, bandages, ointments and medicinal creams. Ms Young has received advice that such items can be costed at $0.50 per client visit. There are other supplies costs that are general in nature, such as printer paper and computer consumables. Ms. Young is determined  to manage her business in a financially astute manner and so has engaged the services of both a small business consultant and an accountant. Service fees for these professionals are $1,200 per annum for the accountant and $1,800 per annum for the financial consultant. Both these fees will be paid in advance in early July 2019. Each year Young Hills Podiatry Pty Ltd will need to be registered as a health care provider. This registration occurs for the calendar year. Ms. Young has already paid the fees ($1,200) for this registration for the calendar year 2019. For the calendar year 2020, it is expected that this registration fee will be maintained at the same cost as in 2019, i.e. $1,200 for the 12 months. Payment for this registration must be made before 31 December, 2019. Projected number of clients As stated earlier, it is expected that it may take time for Ms Young to attract clients to her clinic located in Pleasant Hills.  The clinic will be available for consultations on Mondays, Thursdays and Fridays from 7.30am to 6pm and on Saturdays from 9am to 5pm, but, in the early months, many appointment slots will not be taken up. The table below sets out the number of 30 minute appointment slots that Ms Young expects to be filled for the 12 months, July 2019 to June 2020. Ms Young has had advice from Australian Society of Podiatrists that, for every 20 client sessions she can expect to sell 2 pairs of no-compression socks and one pair of orthotic sandals. 50 pairs of socks can be purchased wholesale for $450, and sandals can be purchased wholesale for $38 a pair. Ms Young will sell these items at the average price charged by members of the Australian Society of Podiatrists i.e. $12 per pair of socks and $50 per pair of sandals. For these items, clients will pay cash on the day of purchase. Purchase of supplies and inventory As set out above, Young Podiatry needs to purchase the following supplies/inventory.

• Orthotic sandals 
• No-compression socks 
• Client treatment supplies
• Office supplies.

The schedule for purchases of these items per month for the July 2019 - June 2020 year together with the estimated cost is given below:  Table 2 – Schedule of purchases Payment for all items will be made in the month of purchase. As noted earlier, for the client supplies, which includes bandages and ointments, the cost per patient session is estimated as $0.50. The office supplies will be purchased for cash on an as-needed basis, with the estimated cost being $100 per month.  Schedule for delivery of packs of sterilised instruments. As stated earlier in this document, Ms Young has decided to organise for RPSS to deliver sets of sterilised instruments. The cost per package of sterilised instruments is $4. Instruments will be delivered weekly, with the order for the next week being arranged on the previous Friday. RPSS will invoice Young Hills Podiatry at the beginning of the month after delivery of the packs of instruments, with payment terms being 7 days. Thus, for example, for packs of sterilised instruments delivered in December 2019, Young Hills Podiatry will be invoiced at the beginning of January 2020, and will need to pay by mid-January. It is important to note that packs of sterilised instruments should always be on hand and thus it is necessary to order in such a way that supplies are always available. Thus, for the first two months, more sets will be ordered than are expected to be used.  Ms Young has prepared the following schedule for ordering and delivery of packs of sterilised instruments:  Financing  for Young Hills Podiatry Pty Ltd. Ms Young has already paid $2,000 on legal costs in setting up the company This item can be considered an operational expense. As soon as Young Hills Podiatry Pty Ltd was set up legally, Ms Young arranged for a bank account to be set up for the new company. As the one shareholder in the company, she deposited some of her savings into this account, and has been using this account to pay for any expenses occurring before the business begins it podiatry services to the public.  Ms. Young’s parents are providing an interest free loan of $20,000 to the business. This money will be deposited in the Young Hills Podiatry Pty Ltd account before 30 June 2019. The arrangements for paying back the loan are that the new business will pay $5,000 cash to Ms Young’s parents on 31 December 2019, 30 June 2020, 31 December 2020 and 30 June 2021.  The balance of the bank account of Young Hills Podiatry Pty Ltd on June 30, 2019 is expected to be $21,000. Table 4 shows the projected income statement for Young Hills Podiatry for the year 1 July 2019 to 30 June 2020.  REQUIRED

1. Prepare the monthly cash budget for Young Hills Podiatry Pty Ltd for the period 1 July 2019 to 30 June 2020. Please present your answers in two decimal places.            
2. Review the cash budget, and comment on the feasibility of the plan based solely on the information about planned future cash flows. Based on your review, are there any
3. assumptions that you would recommend changing, and if so, what impact would they have on the plan and the cash situation? (Word limit: 500 - 600 words) 

 

1. Assuming the relationship between the number of client sessions, the sale of no-compression socks and the sale of orthotic sandals remains as set out in the case study document:
2. What is the break-even number of client sessions for the Young Podiatry, for the year 1 July 2019 – 30 June 2020? Please round up to the nearest whole number.      
3. Tip: you should work out the revenue per client session including the consultation fee and sale of socks and sandals)         
4. What is the margin of safety, in terms of client sessions for the year 1 July 2019 – 30 June 2020?
5. How many client sessions would be needed to make a profit before taxation of $30,000 for the year 1 July 2019 – 30 June 2020?
6. (a) Assume Ms Young’s parents will charge Ms Young at an interest rate of 5% per annum for the loan borrowed, what is the revised break-even number of client sessions for the financial year 1 July 2019 – 30 June 2020?                                       (b) An Aged Care has approached Ms Young and asks that Young Hills Podiatry Pty Ltd provides consultations for their residents. These consultations will be paid at $60 only for each 30-minute session and the Aged Care will pay by cash. No other income will be generated from this order. It is expected 20 residents will attend the treatment sessions each month for 6 months from July – December 2019. Ms Young will take her own equipment and supplies with her.

Assume all other matters and relationships stay as per the original plan, should Ms Young agree to provide these sessions? Show the revised profit projection for the year 1 July 2019 – 30 June 2020 and provide a brief written response (no more than 100 words) explaining your decision.                                                                        Assuming that all other matters and relationships stay as per the original plan, prepare a revised projected income statement for the financial year 1 July 2019 to 30 June 2020.                                                                              

1. It is now July 2024. Young Hills Podiatry is a thriving business. Ms Young made a friend with Ms. Laura Masci a few years ago in the hockey club. Ms Masci is now the CFO of Women’s Hockey Australia (WHA). WHA has in place preferred supplier arrangements with various organisations for provision of services. The preferred supplier arrangement for podiatry services in place at present will cease at the end of 2024, and Ms Masci is responsible for the process to select the preferred supplier for the period 2025 – 2028. Ms Masci believes that her friend Annie Young will want to put forward Ms Young’s company, Young Hills Podiatry to be considered for this relationship. 

Give Ms Masci some suggestions on how to manage this situation. (No more than 300 words).     

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