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BA 141

Chapter 4: Snowmass Specialist Clinic Case Study

Snowmass Specialist Clinic is located in Weber County, Utah. The clinic is open all year round, but it is
mostly a seasonal business since the bulk of patients walk in during the winter months of November to
March, when skiing is in full swing and pertaining injuries are common. The doctors thought about
closing the clinic during the summer months but there seems to be a sufficient summer demand for the
clinic’s services.

The two doctors who run the clinic are Dr. Kevin Halpert, an orthopedist, and Dr. Emily Swan, an
internist. Dr. Swan usually handles all the financial work for the clinic besides payroll which is taken care
of by an outside accountant. The clinic also hired a part-time MBA student named Klaus Jackson to assist
in the preparation of financial reports.

The Victory Rural Bank is the primary lender of Snowmass Specialist Clinic and due to a forecasted
reduction in bank deposits, the bank manager has requested a meeting with each of its commercial loan
customers to discuss the estimate of each customer’s borrowing requirements for the year 2019. Klaus
was tasked by Dr. Swan to come up with an estimate of the clinic’s line of credit requirements, as well as
to prepare the cash budget and forecasted financial statements, to present during the meeting.

A line of credit is short-term loan agreement in which a bank agrees to lend a business some specified
maximum amount. The business can borrow against the credit line at any time it is in force, which
typically is no longer than one year. In general, lines of credit are used by businesses to meet temporary
cash needs, as opposed to using permanent long-term financing.

Clinic Background
Snowmass Specialist Clinic, Inc. (a nonprofit organization) was organized under the laws of the State of
Utah and began operations on October 26, 2009. Operations are supplemented by a grant from the
Federal government under the Rural Health Initiative Community Health Center Program. The clinic was
organized to provide quality health care services to the residents of Weber County and the communities
included in the clinic’s service area by providing ambulatory, primary and preventive health care.

The clinic caters to locals and visitors alike for injuries and illnesses of all kinds. It specializes in
orthopedics, dealing with diagnosis and treatment of tears, strains, and sprains. The clinic is located near
ski resorts such as Powder Mountain, Nordic Valley Ski Resort, and Snowbasin Resort. There are no
other clinics located in close proximity to these ski resorts.

Revenues Forecast
The clinic’s revenues have been continuously increasing throughout the years. Compared to last year,
2019 service revenues are projected to grow at 30% for the months of peak season and 20% for slack
season. This growth rate is expected to be constant until 2022.

In December 2018, it was communicated to the clinic that they will receive a government grant of
$140,000 at the end of each quarter in 2019. Grants are recorded as revenues once received as they will
ultimately be used for the clinic’s operations during the period in which they are received.
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Chapter 4: Snowmass Specialist Clinic Case Study

Financial Information
Based on the clinic’s previous collections experience, Klaus was able to convert billings for medical
services into actual cash collections. On average, about 20% of the clinic’s patients pay immediately for
services rendered. Third-party payers pay the remaining claims, with 25% of the payments made within
30 days and the remainder paid within 60 days.

Clinical labor costs account for most of the clinic’s expenses. During the high season they run up to
$115,000 a month and drops to $70,000 a month during the remainder of the year. Supplies used in the
clinic are 15% of total billings for the month. 50% is paid two months prior to use and the remaining 50%
is paid a month before.

The clinic must pay for other monthly expenses, such as fixed general and administrative expenses
including clerical labor amounting to $22,000/month and lease obligations of $8,000/month. Lease
payments will increase by 10% starting October 2019.

The clinic obtained a $500,00 loan from Victory Rural Bank on September 15, 2018, proceeds of which
was used to upgrade the clinic’s medical equipment and leasehold improvements. The principal balance
is to be paid in ten equal installments plus the corresponding interest every March 15 and September
15. Interest rate for the term loan is 10% per annum.

Depreciation expense is at 15% of cost of property and equipment. Dr. Halpert is planning to acquire a
new orthopedic imaging equipment costing $125,000. The equipment is expected to be delivered and
paid on March 2019. The clinic’s policy is to start recording depreciation in the month of acquisition. In
addition, Dr. Snow wants to retire equipment amounting to $474,455 which are already fully
depreciated as of July 2017.

Prepaid expenses and accrued wages are expected to be the same as 2018 figures. No amounts have
been paid or accrued for income taxes as the clinic is a nonprofit organization exempt from income
taxes under Section 501(c)(3) of the Internal Revenue Code.

Generally, cash from grant revenues received from the government and patient service revenues
received from third-party payers are restricted for grant matching purposes. However, since grant
restrictions are met in the same reporting period, the clinic has elected to report the said restricted
revenues as unrestricted. Any excess service and/or other revenues received over the grants required
matching amount (per the grant budget) would also be classified as unrestricted. Therefore, there are
no temporarily or permanently restricted net assets.

The clinic has to maintain a minimum cash balance of $45,000 at Victory Rural Bank starting January
2019 because of compensating balance requirements on its term loan. In addition, Dr. Swan wants to
maintain an additional $5,000 cash every month for petty cash, operating fund, and contingency fund.
BA 141
Chapter 4: Snowmass Specialist Clinic Case Study

Historical Information
BA 141
Chapter 4: Snowmass Specialist Clinic Case Study

Problem
Snowmass Specialist Clinic needs to estimate its financing requirements and decide whether to enter
into a line of credit arrangement with Victory Rural Bank. The clinic also needs to prove that it will be
liquid enough to pay for its borrowings. Is the clinic in a good financial position? Moreover, should the
clinic prove to have financial liquidity problems, what can the clinic do to cope with its need for cash?

Instructions
1. Assume that you are Klaus Jackson and you will present your estimates to Dr. Halpert and Dr.
Swan before the scheduled meeting with the manager of Victory Rural Bank. Create a monthly
cash budget for the period of January to December 2019 to determine if a line of credit is
needed.
2. Explain to the doctors the clinic’s financial position as supported by the cash budget and
projected financial statements.
3. The following table format may be used for the cash budget:
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Chapter 4: Snowmass Specialist Clinic Case Study

4. The Statement of Activities and Statement of Financial Position should be in the same format as
the historical financial statements.
5. The following assumptions shall be taken into consideration in preparing the cash budget and
financial statements:
a. The clinic will borrow from the line of credit for any required financing at the end of each
month. The clinic will pay an annual interest rate of 11% for its borrowings.
b. The clinic will prioritize paying its short-term borrowings (including line of credit) if there is
excess cash. Once the borrowings are fully paid, the clinic will use the remaining cash to
invest in short-term investments. The clinic will earn an annual interest of 8% for any short-
term investments.

Format of Paper
Prepare a paper containing the following:
1. Position paper (not more than five pages) answering the following questions:
a. Should the clinic obtain a line of credit? How much?
b. Is the clinic in a healthy financial position based on its cash budget and financial statements?
c. Does the clinic have the capacity to pay its loans and expenses as they come due?
d. What are your proposed plans to cope with any required financing/excess cash?
2. Cash Budget for 2019
3. Projected Financial Statements for 2019
4. Supporting computations for the financial statement items

The paper is to be typed, double spaced, on A4 sized bond paper using Calibri font (size 12), with one-
inch margins on all sides.

Format of Presentation
1. Each group will be given ten minutes for the presentation. The presentation should include a
short discussion on the cash budget and projected financial statements. It should, however,
focus more on the narrative included in your position paper.
2. A critic group will be assigned and will be given three minutes to ask questions to the presenting
group.

The presentation and deadline of paper will be during class hours on March 14, Thursday. 70% of your
grade would be based on your paper and presentation and 30% will be based on the peer evaluation.

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