musyiokiones

Running head: BUDGET PROJECT 1

BUDGET PROJECT 2

Budget Project

Liberty University

Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Part 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Part 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Part 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Part 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Part 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Part 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Part 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Part 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Budget Project

In this paper, I present several financial analyses. I begin with an assessment on the financial health of Bank of America and provide a recommendation on a maximum loan amount to be authorized by its board. Thereafter, I provide various case-based analyses of selected hospitals and healthcare organizations. The results of this research show the power of even basic financial analyses and its importance to the long-term management and viability of any business organization.

Part 1: Financial Statement Analysis

Memo on Bank of America Financial Health

I am performing a financial analysis on Bank of America (BOA) using its 2016 financial and annual reports (2016 was the year with the most available data on the BOA website). With this data, I use horizontal statement analysis and financial ratios to evaluate BOA’s liquidity, profitability, financial efficiency, and capital/debt structure. I present the overall strengths and weaknesses of BOA based on these analyses. I recommend a maximum loan amount that should be authorized for BOA.

Evaluating Selected Financial Data

My analysis begins by examining BOA’s revenues and net income from the years 2012 through 2016. In 2012, BOA’s total revenue was $82.8 billion – the lowest for the time period (Bank of America, 2016). In 2013, BOA’s revenues peaked for the period under analysis with the bank bringing in $87.5 billion. Revenues were $85.9 billion, $82.9 billion, and $83.7 billion for the years 2014, 2015, and 2016, respectively (Bank of America, 2016). These annual revenues only show modest variation, suggesting the bank’s revenue base is stable.

Whereas revenues have been fairly constant in the given time period, net income has shown impressive growth. In 2012, BOA’s net income was just $3.8 billion, or four percent of revenues (Bank of America, 2016). By 2016 that number had skyrocketed to $17.9 billion, or 21 percent of revenues, nearly five times more than the 2012 net income figure (Bank of America, 2016). In addition to this jump, it is worth noting that the years 2013-2015 showed considerable fluctuation. In 2013, net income was $10.5 billion (more than twice the previous year), in 2014 it was $4.4 billion, and in 2015 it jumped to $14.3 billion (Bank of America, 2016). While BOA has shown some impressive income figures, the variability between years is great and not indicative of a clear pattern.

Financial Ratio Analysis

Efficiency ratios provide a measure of firm financial management performance (Hickman, Byrd, & McPherson, 2013). The 2016 annual report provides BOA’s efficiency ratios for the years 2012 through 2016: 86.13 (2012); 78.33 (2013); 87.22 (2014); 68.86 (2015), and 64.95 (2016). These ratios being above 50 percent is not optimal in the banking industry (Kenton, 2019). Liquidity ratios provide a measure of a firm’s capacity to service its debt and finance short-term obligations (Hickman, et al., 2013). In 2016, BOA’s liquidity ratio was 1.13 (Bank of America, 2016). A ratio over one indicates a healthy liquidity capacity (Hickman, et al., 2013). Profitability ratios are metrics to assess firm income and overall operational success (Hickman, et al., 2013). In 2016, BOA’s return on average shareholder equity was 6.72 (Bank of America, 2016). A firm’s debt to equity ratio is indicative of its capital structure (Hickman, et al., 2013). In 2016, BOA’s debt to equity ratio was 0.76, indicating more shareholder equity than debt (Bank of America, 2016).

Strengths & Weaknesses and Loan Recommendation

BOA’s financial strengths include a streamlined structure, adequate capital, good asset quality, and adequate liquidity (MarketLine, 2019). Its weaknesses include its cost efficiency measures, outstanding shares, and its net interest margin (MarketLine, 2019). The noted strengths mean that BOA can consider taking a loan. A liquidity ratio of around .90 is considered manageable (Kenton & Hayes, 2019). In 2016, BOA had $515 million in liquidity sources globally. Therefore, the maximum loan amount that should be authorized is $400 million, which maintains a liquidity ratio about .90 and does not tap into all liquidity sources as leverage.

Part 2: Budget Analysis

The following figure presents a line item of expenses, the total budget allocated to each expense, whether the expense is fixed or variable, and how much of the total budget is allocated toward the Alpha or Beta centers. The 2018 budget anticipates 12,600 total visits, with about 60 percent of those being to Alpha centers and 40 percent being to Beta centers. On average, Alpha centers generate $160 per episode of care. On the other hand, Beta centers generate $240 of revenue. The distinction in revenues per center is due to the visit types to each. Beta centers receive visitors from types 8 and 9 which have lab costs 1.4 times more than types 1, 2, and 3 which predominate Alpha centers. Thus, Beta centers generate more revenues per visit. Given previous years and 2018 projections, I expect that the centers will generate similar profit margins. Management’s current expectations are consistent with my analysis.

Figure 1. Line item budget including expense type and allocation.

Part 3: Monthly Cash Budget

Jasper Gardens Nursing Home projects $7,581,000 in total expenses in 2018, which breaks down to $631,750 average monthly costs. All other costs will be considered based on a straight-forward monthly breakdown of cost and revenue sources. Jasper Gardens has six means of generating revenues, including Medicare Parts A and B, commercial sources, Medicaid, self-payers, Veterans Affairs (VA) clients, and private insurers. It must be determined whether Jasper Gardens can generate and recover enough revenue each month to cover its expenses.

Payments from Medicare Parts A and B are expected to generate $4,969,611 in revenues. Monthly revenues from this source would amount to about $414,134. Medicare and Medicaid payments are made in a staggered fashion, however. More payments come in as the year progresses. In the first month, Medicare only reimburses 5 percent of what it owes providers, amounting to $20,706.71 in the first month. Revenues from Medicaid for 2018 are expected to reach $3,834,746, but no payments are made in the first 30 days. Jasper Gardens anticipates $269,686 in revenue from commercial, $1,745,292 from self-pay, $97,292 from VA, and $139,292 from private insurers. In the first month, these sources pay 25 percent, 40 percent, 25 percent, and 30 percent of their total bill, respectively. Given these figures, Jasper Gardens is projected to bring in just over $500,000, which is over $125,000 less than the required $631,750 average monthly costs.

As the year progresses, Jasper Gardens’ financial position will continually improve, assuming all projections are met. In fact, projected revenues from Medicare and Medicaid by the end of the second month will account for $479,343 of total revenues for that month, or about 75 percent of the total amount needed to cover expenses for that month. As new patients come in each month, and payments are made on services rendered from previous months, then a snowball effect should occur generating sufficient monthly revenues for the rest of the year. However, Jasper Gardens is expected to have costs that exceed revenues for the first six months. If possible, management should work with some of its creditors and vendors in an effort to defer at least some of the payments from the first half of year.

Part 4: Weber Hospital

Weber Hospital had a debt to asset ratio of 0.365 in 2017, based on total assets of $81.5 million and total debt of $29.8 million. If Weber wished to raise its debt to the maximum sustainable ratio of 0.4 then it could have increased overall debt burden by 10 percent, or approximately $3 million. Weber’s 30-day spending is estimated to be about $1 million based on total operating expenses of $131 million in 2017. On per diem breakdown Weber spends roughly $36,410 a day. With $3 million of cash on hand at the end of 2017, Weber could have financed its operations for about 82 to 83 days. Its cash to debt ratio is 0.13. Around 73 percent of total revenue is consumed by salaries and benefits paid to employees. A BBB rating requires at least 53.6 days of cash on hand, at least a 37.9 percent cash to debt ratio, and salaries and benefits below 56.3 percent of total revenues. Given this analysis, Weber is probably not even worthy of a BBB rating, but that is more likely than AA.

If Weber sells $2.9 million in bonds at 7.5 percent annual interest rates, its monthly obligations would amount to $33,862, or $406,353 a year. While Weber can meet these obligations, it will probably result in a profit loss. Around 70 percent of those payments would be principal with 30 percent servicing the interest alone.

Part 5: Surgery for Middleboro

The proposed investment has a positive projected rate of return. The project requires a 6 percent hurdle rate. Based on the provided information, I calculated a 6 percent internal rate of return (hurdle rate) for this project. Since the hurdle rate was met, Middleboro should follow through on the proposed project and investment.

Part 6: Hospital Documents

In this case, I assume that the coalition is on one plan, or at least with the same company. I also assume that both MCH and WH currently charge the same for each patient day. Next, each hospital will need to calculate the expected revenue volumes and profit margins from this coalition, and whether they can afford to offer a 10 percent discount. If a profit can be achieved while still offering the discount, then it is economical to accept the offer. On the other hand, if both hospitals chose to independently reject the offer, and both have the same cost per patient day, then the coalition’s efforts will have failed.

Part 7: Medicaid Expansion

In this case, federal grants only constitute a small percentage of total revenues for both hospitals. Most revenues for the hospitals are derived from county and state budgets. In fact, Table 8.5 indicates that 55 percent of hospital funding comes from the county. Out of a total revenue of almost $4.4 million in 2017, only $365,365 came from federal sources, or less than ten percent. While this represents a clear potential loss of funding, it is possible that the state has a plan to replace federal sources.

Part 8: New Primary Care Practices in Jasper

The dataset does not provide information on Jasper’s itemized costs. However, Table 3.6 can yield some projections as to what they might be. Each year expenses are about $2 million. Equipment, staff recruitment and onboarding, facility, information technology, and other associated costs are projected to be 150 percent of annual operating expenses. Therefore, the estimated cost of one facility is $3 million. The Jasper office has rent costs that are up to half as much as the cost to maintain the office in Middleboro. This suggests that leasing is substantially less expensive than ownership, although it does limit capacity to alter and use the building as desired.

Conclusion

In this paper, I presented a financial analysis of Bank of America in the form of a memo on a loan authorization. Thereafter, I conducted various financial analyses on hospitals and healthcare organizations. The result of this research is to show the capacity of financial analyses to provide deep insights into organizational health. This information allows organizations to make informed short- and long-term strategic business decisions.

References

Bank of America Corporation. (2016). Annual report. Retrieved from http://media.corporate-ir.net/media_files/IROL/71/71595/BOAML_AR2016.pdf

Hickman, K., Byrd, J., & McPherson, M. (2013). Essentials of finance. Bridgepoint Education, Inc. ISBN: 978-1-62178-065-6.

Kenton, W. (2019). Efficiency ratio definition. Investopedia. Retrieved from https://www.investopedia.com/terms/e/efficiencyratio.asp

Kenton, W., & Hayes, A. (2019). Liquidity ratio definition. Investopedia. Retrieved from https://www.investopedia.com/terms/l/liquidityratios.asp

MarketLine. (2019). Company profile: Bank of America Corp. MarketLine, Bank of America Corporation SWOT Analysis. 1-9. Accession Number: 134448900