The Importance of Revenue Cycle Management and Its Impact on Your Quality of Earnings Report
October 30, 2023
Written by Grant White, CPA, Colin Haslett, and Joe Scott, CPA
In the healthcare industry, investors evaluate potential investment opportunities that typically first come through sell-side marketing materials like teasers or confidential information memorandums (CIMs). These materials show the company’s financial performance over the past two years and projections for the current and next two to three years. It’s crucial to note that these projections naturally involve assumptions about future growth.
While these assumptions help buyers grasp the company’s strategic direction and growth opportunities, relying solely on them might lead to overestimations in purchase prices or underperformance post-acquisition. Financial projections have the potential to be biased and overly optimistic by overlooking potential market shifts or industry trends that may impact performance.
For instance, in the healthcare services industry, projected financial performance might hinge on key events such as:
Prudent investors recognize the importance of buy-side due diligence. This diligence serves not just to verify historical data, but also to test the credibility of projected financial assumptions. Diligence teams must reconcile key documents, analyze historical financial and operational trends, and engage in candid conversations with key management personnel to evaluate these assumptions.
To illustrate this point, consider two scenarios wherein a company projects $1 million in revenue from hiring a new provider in its CIM distributed to potential investors:
In summary, buy-side diligence is instrumental in verifying management’s claims and assessing the feasibility of a company’s projections. The insights gained through the diligence process help buyers make informed investment decisions, guard against inflated purchase prices, and provide buyers with more accurate expectations of post-close performance.