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Overcoming ‘‘Financial Phobia’’ Julie A. Meek, PhD, RN

E xpectations for including a financial rationale as an integral part of a project proposal often results in eyes rolling back and utterances of anguish. For many

reasons, nurses have shied away from putting serious effort into the development of financial expertise. What is now in- credibly clear is that anyone expecting to be ‘‘at the table’’ influencing healthcare decisions must have financial acu- men. Developing financial expertise for today’s healthcare environment involves a basic understanding of financial and accounting principles as well as the ability to use these principles in thinking strategically when weighing the pros and cons of decisions. In addition, today’s nursing leaders need an in-depth understanding of healthcare reimburse- ment and levers for maximizing revenues while protecting resources and ensuring high quality and safe patient care. Many nurses have the desire to learn about healthcare fi- nancing but fear the topic will be overwhelming and do not know exactly where to start. Here is some practical ad- vice about what is important to know along with helpful resources for getting started.

THE BASICS The primary purpose of accounting is to provide informa- tion to an organization’s managers and investors about the financial condition of the entity in the form of an income statement (sales revenue compared with expenses), a bal- ance sheet (the financial position of the business), and a statement of cash flows (cash gained from all sources and how the cash was used). Taken together, these 3 reports are often referred to as ‘‘the financials.’’ Financials are used to monitor the financial health of the entity and to generate basic assumptions for future business activities planning. This information is necessary to project the impact of planned

activities on the organization. Developing an understand- ing of the income statement, balance sheet, and statement of cash flows is a fundamental first step in the development of financial expertise.

The income statement, also called the profit and loss statement, is a summary of the profit-making activities of the business. It reflects revenues compared with the ex- penses for a period (typically reported monthly). The basic format of the income statement is to first list sales revenues, then subtract the expenses of the business, to yield the net income, which is often called the ‘‘bottom line.’’ The bot- tom line is the final profit for the period after all expenses are deducted from the revenues. In healthcare, sales reve- nues are primarily reimbursements from payers such as insurance companies, government programs, or individual self-pay for procedures, tests, and care delivered. Expenses represent direct costs of providing a product or service as well as any overhead associated with the organization (administrative and general operating costs). By subtracting all expenses from all revenues for a defined time period, decision makers then know the amount of profit or loss made by the business. At first blush, an income statement would appear quite straightforward, but there are many management decisions reflected in this statement. Things to consider include how expenses are categorized, whether expenses are fixed or vary by sales volume, the ratio of fixed to varied expenses, and an organization’s breakeven point in the year (where revenues now exceed fixed costs and now become profit).

The balance sheet is a statement of the financial condi- tion of the business. It summarizes the assets owned by the business on 1 side with the sources of its assets on the other side. There are 2 sources of assets: liabilities and owner’s equity. Although it may sound strange to call a liability an asset, liabilities come from borrowing money or buying things on credit that have not been paid for yet but are es- sentially assets being used to grow the business. Owner’s equity includes money invested in a business by its owners and any profit that the business has earned and retained to grow or provide a safe reserve for the business. The report is called a ‘‘balance sheet’’ because the total assets must

Author Affiliation: Clinical Professor, School of Nursing, Indiana Univer- sity, Indianapolis. The author reports no conflicts of interest. Correspondence: Julie A. Meek, PhD, RN, School of Nursing, Indiana University, 1111 Middle Drive, NU429E, Indianapolis, IN 46202 ([email protected]). DOI: 10.1097/NUR.0000000000000144

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equal the sum of the total liabilities plus the owner’s equity. The owner’s equity is thus the ‘‘balancing’’ number and, for that reason, reflects the business’s net worth. The calcula- tion is as follows:

Assets j Liabilities = Net Worth Thus, the balance sheet offers an important report

of the overall financial condition of the entity. Although the term net worth may suggest the amount a company could be sold for, nothing is further from the truth. Many other factors come into play when valuing a business, but the number does reflect the ‘‘book value’’ of the owners’ equity.

Finally, the third component of the financials is the state- ment of cash flows, which is a summary of the sources and uses of cash for a designated time period. Successful man- agers, especially entrepreneurs, know that ‘‘cash is king’’ and both profit and cash flows must be managed as the 2 are rarely equal. Many an entrepreneur has been too fo- cused on making a profit, resulting in cash losses and the untimely demise of the business. Successful entrepreneurs understand the relationship between profit and cash flow and effectively manage both.

For any given time period, cash flows are divided into 3 basic categories: n Cash coming in from the profit-making or operating

activities of the business n Cash inflows and outflows from the investing activities

of the business n Cash inflows and outflows from the financing activities

of the business Cash coming in from the operating activities of the

business will not necessarily equal the profit listed in the profit and loss statementVas the cash can be more or less than the reported profit for the time period. Consider 2 trains headed to the same destination. The first train reflects the actual recording of sales revenue when the product/service was sold along with expenses incurred, and perhaps that first train is ahead of the second cash flow train, which reflects cash from the sale when it was actually received. The cash outflows from investing activ- ities reflect any long-term investments such as the purchase of a building or piece of equipment, and likewise, the inflows reflect any divestments of such assets. Finally, fi- nancing activities include cash inflows from borrowed new money or capital received from investors, whereas cash outflows represent monies used to pay off debt as well as any distributions made to owners. The last line of the cash flow statement reflects the net increase or decrease in cash caused by the 3 types of cash flows. ‘‘Bottom line’’ never refers to the cash flow statement, but rather the net profit reported in the income statement. Although the profitability of a business often receives the most attention, the amount of cash flow from that profit merits careful attention as well.

RESPONSIBILITIES AND OPPORTUNITIES FOR THE USE OF FINANCIAL INFORMATION Rules and standards have been established for measuring profit and reporting financial information. These standards are called the generally accepted accounting principles, or GAAP for short. Business managers must make sure that their financial reports follow GAAP. If a business’s financial statements are later discovered to be flawed or misleading, both the business and its executives can be sued for dam- ages incurred by investors and lenders. No court of law will let a business manager plead ignorance. Entrepreneurs must take personal responsibility for completely under- standing accounting methods used to prepare their finan- cials. Business managers should closely scrutinize all cost figures because virtually every expense that managers use to make decisions is based on choices between alternate accounting or allocation methods. Be clear about account- ing decisions and the justifications for selecting them.

So how can financial acumen make one a better entre- preneur or manager? That is really the bottom line isn’t it? Accounting provides financial information, but it must be understood for it to be used for making insightful decisions before plunging ahead. A decision may feel right at a gut level but might not be wise upon deeper financial analysis. Smart managers know the key variables that determine an organization’s profit performance (key levers) and can make informed, thoughtful decisions that protect and im- prove profit while maintaining positive cash flows. Start by analyzing revenue sources and expenses associated with delivery of that product/service. Consider possible wasteful expenses and inefficient processes, and scrutinize the cost or use of supplies or inappropriate use of highly qualified and highly compensated staff time. A product or service may suffer revenue losses because of inefficient inflows and outflows of patients. For example, every hour a patient waits to be admitted or discharged, when added over an annual period, may represent significant profit loss to the unit, not to mention inconvenience and perhaps unneces- sary suffering on the part of patients and their families. This situation is an important lesson in profit making called op- erating leverage. A seemingly small increase in sales vol- ume (such as fitting in 2 more surgery cases per day via efficient and smooth workflows) has a big effect on profit because it takes a certain volume of cases to cover the sur- gical unit’s fixed costs. Once those fixed costs are covered, any sales volume over that number contributes significantly more to profit, which is called contribution margin. It is not unheard of for a 5% increase in sales volume, for example, 2 to 3 more cases per day, to cause a 30% increase in profit. This is where understanding a unit’s financials really be- comes fun! Using Lean Six Sigma techniques to map the current versus desired states with the associated depen- dencies on other stakeholder’s workflows such as house- keeping, transportation, and the receiving unit’s patient

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inflows can enlighten and energize the stakeholder groups to make the needed changes. Bottom line, using financial information to inform improvements creates better align- ment of human and financial resources to the benefit of all of an organization’s stakeholders.

Developing Financial Acumen There are many ways to develop business acumen. A good basic start is to purchase a book that explains basic ac- counting principles in ‘‘lay language.’’1 Using that basic knowledge, ask to see a sample unit’s financial statements. Seek out someone in the organization who can explain each element of the reporting and ask lots of questions un- til all is clear. Suggest areas for improvement and include finance staff on rapid improvement teams so that they can help model various solutions in financial terms.

Take a basic accounting course and a course in health- care financing. Learn to use spreadsheet software2 by taking a basic course either online or in a continuing edu- cation format. The intelligent and informed use of spread- sheet software, once learned, provides an invaluable tool that can be used in many ways to support sound decision

making. There are also a number of massive online open course3,4 that can provide a basic introduction to ac- counting methods at no cost. Finally, seek out a financial mentor, a person with formal accounting education and credentialing, to provide guidance during formative stages of building financial prowess. Regardless of how finan- cial knowledge, skills, and abilities are developed, the demand for nurse entrepreneurs and leaders with finan- cial expertise is rapidly increasing. For nurses with career aspirations to become transformative healthcare leaders at the executive decision-making table, overcoming the fear of financials is a must.

References 1. Tracy JA. Accounting for Dummies. 5th ed. Hoboken, NJ: John

Wiley & Sons; 2013. 2. Microsoft Excel 2013. Microsoft Corporation. All rights reserved. 3. Bushee BJ. Wharton’s business foundations specialization: intro-

duction to financial accounting. https://www.class-central.com/ mooc/769/coursera-introduction-to-financial-accounting.Accessed March 15, 2015.

4. Altman S. Stanford University: how to start a start up. https://www .class-central.com/mooc/2572/how-to-start-a-startup. Accessed March 15, 2015.

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