Benchmark: Know Where Your Business Stands--
And Look At Non-Traditional Benchmarks To Tell Your Whole Story

For-profit organizations are driven by quantifiable financial benchmarks — stock price, revenue, and net income — that allow them to track success. Not-for-profit organizations, which focus on mission and are often highly dependent on donations, have different motivations and expectations. So while setting financial benchmarks is an important undertaking for both types of entities, "traditional financial benchmarks usually don’t tell the whole story for a not-for-profit organization," says Tanya Hahn, senior vice president at Lancaster Pollard.

Unlike for-profits, the resource mix for not-for-profits includes gifts and donations, people skills, volunteers on the board and working in the facilities, and employees who are often paid less than those in the for-profit world. When assessing long-term success, then, not-for-profits are often driven by benchmarks that address more subjective, qualitative things — the mission, the board and management, and the strategic plan.

Some financial benchmarks

Financial benchmarks help you compare your organization to your peers and to industry standards, thereby evaluating your success outside the vacuum of your own unique operation. Benchmarks provide a way to convey financial results, with clarity, to board members, management, employees, residents, and community stakeholders.

You can benchmark a lot of things: cash in the bank, revenues generated, campus population, occupancy statistics, payer mixes, etc. The primary financial benchmark that a not-for-profit senior living organization should assess, though, is days cash on hand.

"If you didn’t bring in another dime of revenue, how long could you operate with the cash you have on your balance sheet," explains Hahn. "For lower investment-grade organizations with an entrance-fee model, that number is in the 300-day range. Fewer days — a minimum of 100-120 days — are required for rental-only models, because many of those organizations rely on Medicare and Medicaid reimbursements. In either case, the more cash on the balance sheet, the more financially flexible the organization can be."

In addition, the organization should review its financial structure to determine how much leverage it has. Does it generate enough earnings to run its core operations? Is it managing the expense base? What resources have been put on the balance sheet? "Managing expenses is the weakest area for most not-for-profits," says Hahn. "In fact, many not-for-profit CCRC campuses have negative operating margins and only get to a positive net income by adding in their earnings from investments. But you don’t want to be too reliant on investment earnings."

Then, how much debt is the organization taking on? Considering amortization and entrance-fee refunds, the typical CCRC tends to have a fairly high debt service ratio — in the 70% to 80% level, according to Hahn. So if you’re taking on a new project, the question becomes: How much leverage does that create?

And what about the external factors? Is the market increasing or decreasing? How are you dealing with competitors coming into the area? What is the reimbursement environment in your state? "You can’t change much about external factors," says Hahn, "but you must manage around them." If the state lowers the Medicaid reimbursement, for example, you must have the resources to deal with that for a period of time.

"Setting good financial benchmarks and achieving them year in and year out helps organizations become financially flexible," she adds. "And that allows them to take advantage of opportunities and weather downturns in the market such as we’re experiencing now."

Not-for-profit senior living organizations should do a self-assessment at least quarterly, according to Hahn. "Every competing for-profit organization does it," she says. "Some of the large ones do it monthly. You have to set milestones and monitor them on an ongoing basis to know where your organization is heading."

Continuing Care Accreditation Commission (CCAC), Standard & Poor’s, and Fitch all evaluate and rate senior living organizations, but very few of the 2,000-plus not-for-profit senior living communities in the country are rated. Some state organizations evaluate health-care organizations, too, although mostly on the hospital side. Standard & Poor’s rates roughly 90 different not-for-profit senior living organizations and differentiates its medians by single-site vs. multi-site and contract type. Fitch rates about 70 organizations and analyzes its medians by contract type. But organizations are all different, Hahn warns, so when picking a median, know the limitations of the one to which you’re comparing your organization.

"The Standard & Poor’s and Fitch medians can serve as a goal," she says. "But if your organization doesn’t quite meet those benchmarks, it doesn’t mean that you’re in less of a position to do a project or access the capital markets. It may simply mean that you’re a small organization."

CCAC medians include 310 organizations differentiated by single-site vs. multi-site and contract type. About 40% of those organizations are rated, so there will be some duplication with the rating agency data.

Hahn also cautions providers about depending too much on the medians supplied by the rating agencies when evaluating financial benchmarks. "The organizations included in the Standard & Poor’s and Fitch medians are highly concentrated in the Midwest," she says. "That’s a limitation if your facility is located in New England or California; 18 states have no representation. And there are some slight differences in calculating the ratios." Nevertheless, the medians are a helpful tool for setting benchmarks and a useful gauge when evaluating them.