Part 2 of Financial Analysis Research Project using Excel & Tableau.

Research Project: Expansion of ABC Hospital

Student Name

Parker University

Professor Name

Accounting for Decision-Making: ACCT 6301

Date

Abstract

Facility expansion is important for the growth of a hospital. However, facility expansion should follow a general high-level, step-by-step process to improve and update while expanding the hospital’s existing facilities. This general high-level, step-by-step process includes assembling a team for the project, evaluating the existing facility with the intention of finding out what aspects need improvement while designing equipment and evaluating the entire process so that expansion proceeds smoothly and the end result is successful. The entire process incorporates financial decision-making as it concerns the financial position of the company. The organization’s position is based on its financial statements. As such, facility expansion is only possible if appropriate financial considerations are explored. This purpose of this research project is to explore the financial position of ABC Hospital. Through the use of this fictitious organization’s financial reports from years 2014 through 2018, the reader may analyze appreciate whether or not expansion is a reasonable step forward.

Introduction

Leadership of healthcare organization have many aspects to consider when deciding to expand their facilities. Fortunately, many tools of analysis exist so that leadership may be able to accurately make decisions regarding their organization. Appropriate decision-making concerning expansion occurs when all organizational stakeholders consider the maximum utility of such an undertaking (Adair, 2011). Leadership uses various tools in the decision making process such as graphs, diagrams, and probability equations. In this case, a decision will be made whether to expand the facility or not.

Part 1

Key Financial Statement Ratios

Current ratio

From the excel analysis, the current ratio of the ABC Hospital was 3.725 in 2014, 3.383 in 2015, 2.249 in 2016, 2.394 in 2017 and in 2018 the Current ration was 2.212. Looking at these figures, it is clear that the current ratio of the hospital has decreased since 2014. However, despite the decrease, the ratios are still high (Garrett & James III, 2013). Generally, the current ratio is used in determining an organization’s ability to pay off their short-term liabilities with the use of their current assets. This ratio indicates that the debts of the company due in a year or less are less compared to its assets. As such, the hospital has the capability of paying off its short-term liabilities with its current assets. From the chart, the reader can see that for 2018, ABC Hospital has about two times the capability to pay its short-term liabilities using its current assets.

Debt to total asset

The debt to total asset ratio for ABC Hospital was 0.054 in 2014, 0.059 in 2015, 0.078 in 2016, 0.071 in 2017, and 0.07 in the year 2018. Looking at this data, it is clear that the ratio increased during that time period. It is important to understand that a debt to asset ratio that is equal to one (=1) indicate that the company owns the same amount of liabilities as its assets. This means that the company is highly leveraged. However, a ratio that is greater than one (>1) indicates that the company owns more liabilities than it does assets (Rist, Pizzica, & LLC, 2014). Moreover, when considering ABC Hospital, it is demonstrated that the debt to asset ratio is less than 1 from 2014 through 2018. As such, this organization has less liabilities as compared to its Assets.

Debt to total equity

The Debt to total equity of ABC Hospital was 0.057 in 2014, 0.063 in 2015, 0.085 in 2016, 0.076 in 2017, and 0.075 in the year 2018. It is also clear that there is a slight increase in these ratios from 2014 through 2018. Despite the increase, these ratios are considered low. In this regard, it is important to understand that low debt-to-equity ratio indicates there is a lower amount of financing of the debt by its lenders, versus funding through the equity via the organization’s shareholders. On the other hand, a higher ratio means that the company is getting most of its financing by borrowing money, which subjects the company to potential risk if debt levels are too high. However, considering ABC Hospitals’ situation, lower ratios may indicate that the organization is safe from this kind of risk. The company’s debts are low and it is not exposed to potential risks in cases where the debts rise. Furthermore, the ratios indicate that ABC Hospital has a higher financing by equity. It is important to understand that debt may be helpful, in facilitating the company's expansion. Therefore, since ABC Hospital has a favorable debt to total equity ratio, it will be able to expand because the organization will not have to pay many debts. As such, these finances are invested to expansion (Juan, 2007).

Net profit on sales

The net profit on sales ratio for ABC Hospital indicates that the organization had a net profit on sale ratio of 0.121 in 2014, 0.138 in 2015, 0.090 in 2016, 0.118 in 2017, and 0.080 in the year 2018. Generally, the net profit on sale is sometimes referred to as the net margin. This ratio demonstrates how much net income the company makes through total sales. As a rule, the higher the net profit margin the more efficient the organization is at converting sales into actual profit. In this project, the current net profit on sale of the ABC hospital is 0.08 meaning that the hospital nets a profit of 8 percent on its sales. Although, this ratio is low, it is not a bad sign unless the organization uses an ineffective cost structure and/or poor pricing strategy. Nevertheless, a low net profit on sale is likely to be contributed to inefficient management, high costs and weak pricing strategies among other factors.

Inpatient to outpatient revenue

An analysis of the inpatient to outpatient revenue demonstrates that the inpatient revenue is higher than the outpatient revenue. This is due to the fact that many patients are being admitted as inpatient. It also means that the hospital is admitting many patients. This is a signal that more space is needed and that it is prudent and wise for the hospital to expand its facilities. Expanding will allow the hospital to accommodate more inpatients and, therefore, accumulate more revenue. The inpatient to outpatient revenue ratio is also important because it assists leadership in making informed decisions regarding expansion. For example, the company may use this ratio to determine a number of factors such as the number of beds (Khan, 2019). Additionally, it is essential to consider alternative approaches when planning hospital expansion. The ratio will also help in determining the number of employees working for the organization.

Job Costing

Job costing helps track the costs and revenues by job. This metric enhances the standardized reporting of profitability by job. It helps in assigning the job numbers to different individual or workers, the assigning of the items of the expenses as well as revenues (Schönsleben, 2018). Tracking of the cost by individual jobs is important because it helps the organization maintain cost and ensures that ABC Hospital can management costs. Below are charts showing job costs:

Moreover, appropriate job costing results in better profitability for the organization. It also helps in project estimation, appropriate management decisions, and timely financial reporting. Proper job costing uses the costs recorded to a particular contract to reveal the profitability of each job, which can then be compared to the original profit estimate Furthermore, job costing helps the organization determine if a given project is within the budget or if a particular project is under budget and whether a project under consideration is over the budget. This is easily achieved through the interpretation of the cost performance index (CPI). Additionally, the schedule performance index (SPI), determines if the project is on schedule or not.

Impact of expanding the facility

Expanding the facility will impact the entire organization. The hospital will be required to hire more employees to be able to work in a larger facility. More employees will result in an increase in cost because more salaries increase the organization’s expenses. An expanded facility will also require new or extra medical equipment. These aspects alone will increase ABC Hospital’s cost of operation. On the other hand, as the facility expands, more services may be provided and more patients will be treated. As a result, the organization’s revenue will increase.

Part 2

Data Analysis

Create a chart or charts in Tableau that shows the benefit or concern of expanding in Texas based on the cost data provided.

Overall Analysis

Conclusions

The Conclusion section should summarize for the readers the topics of importance that led to your final conclusions/analysis regarding this case. You would include some specific areas of focus from your analysis to reinforce your conclusion.

References

Adair, J. (2011). Effective decision making (REV ED): The essential guide to thinking for management success. Pan Macmillan.

Centers for Medicare & Medicaid Services (2020, September 5). Inpatient prospective payment

system (IPPS) provider summary for all diagnosis-related groups (DRG) – FY2018. [CSV to Excel data file]. Retrieved from https://data.cms.gov/Medicare-Inpatient/Inpatient-Prospective-Payment-System-IPPS-Provider/yekz-wzdr/data

Garrett, S., & James III, R. N. (2013). Financial ratios and perceived household financial

satisfaction. Journal of Financial Therapy, 4(1). doi:10.4148/jft. v4i1.1839

Juan, D. A. (2007). Fundamentals of accounting: Basic accounting principles simplified for accounting students. AuthorHouse.

Khan, M. I. (2019). Re-classification of financial ratios. doi:10.15405/epsbs.2019.08.4

Rist, M., Pizzica, A. J., & LLC, P. (2014). Financial ratios for executives: How to assess company strength, fix problems, and make better decisions. Apress.

Schönsleben, P. (2018). Cost estimating, job-order costing, and activity-based costing. Integral Logistics Management, 655-686. doi:10.4324/9781315368320-19