How to Improve Operating Margins

HFMA

Financial Reporting Function

Financial Reporting Function Financial Accounting Standards Board

(FASB) FASB standards rest on certain

assumptions: Ø Monetary unit Ø Economic entity Ø Time period Ø Going concern

Financial Reporting Function

FASB Two key principles Ø Cost principle Ø Full disclosure principle

Financial Reporting Function

Generally Accepted Accounting Principles (GAAP)

Ø Consistency Ø Relevance Ø Reliability Ø Comparability

Financial Reporting Function Financial Statements

For Profit Not-for-Profit

Balance Sheet Statement of Financial Position

Income Statement Statement of Operations

Statement of Cash Flows Statement of Cash Flows

Financial Reporting Function

Accepted Accounting Methods Ø Accrual Ø Cash Ø Fund

Financial Reporting Function Financial Statement Presentation Ø  Two years are displayed

-  Prior year to the right of the current year

Ø  Statement of Operations or Income Statement are for a period of time—typically a month

Ø  Statement of Cash Flows reflects a period of time consistent with the

Statement of Operations or Income Statement—typically a month Ø  Statement of Financial Position or Balance Sheet reflect the status

of Assets, Liabilities, and Net Assets/Shareholders’ Equity as of a day.

Financial Reporting Function

Ratio Analysis Ø Liquidity Ratios Ø Profitability Ratios Ø Asset Efficiency Ratios Ø Capital Structure Ratios Ø Operating Indicators

Financial Reporting Function

Ratio Analysis Ø Liquidity

-  Current ratio -  Quick ratio

Current ratio = Current Assets/Current Liabilities

Quick ratio = (Cash + Marketable Securities + Net Accounts Receivable)/Current Liabilities

Financial Reporting Function

Ratio Analysis Ø Profitability

-  Operating margin -  Return on assets

Operating Margin = [(Operating Revenue-Operating Expenses)/Total Operating Revenues] x 100

Return on Assets = Excess of revenues over expenses/ Total Assets

Financial Reporting Function

Ratio Analysis Ø Asset efficiency

-  Total asset turnover -  Inventory turnover

Total Asset Turnover = Total Operating Revenue/ Total Assets

Inventory Turnover = Total Operating Revenue/ Inventory

Financial Reporting Function

Ratio Analysis Ø Capital structure

-  Debt to Capitalization -  Debt service coverage

Debt to Capitalization = [Long-term Debt/ (Long-term Debt + Unrestricted Net Assets)] x 100

Debt Service Coverage = (Excess of revenues over expenses + Depreciation + Interest)/(Principal payment + Interest)

Financial Reporting Function Ratio Analysis Ø Operating indicators

-  Length of stay -  Occupancy rate -  Case mix index -  Labor as a % of operating revenue -  Net days in receivables -  Days in revenue outstanding

Financial Reporting Function Operating Indicators: Industry measures using operational statistics that may not be related to financial statements. Gauges operational efficiency of the organization to others in the industry

•  Length of Stay = Total Inpatient Days/Total Discharges; •  Median 2007 LOS: 4.7 days

•  Occupancy Rate = Total Inpatient Days in the Period/(Licensed Beds x Days in the period)

•  Median 2007 Occupancy %: 68% •  Case Mix Index = Sum of the number of cases in each DRG x the weight for that

DRG/Total Cases •  Median 2007 CMI: 1.52

•  Labor as a % of Operating Revenue: 40.42%-50.76%

•  Net Days in Receivable = Total $ in Net Patient Accounts Receivable/Average Net Daily Patient Revenue

•  Average Net Daily Patient Revenue = Total Net Patient Revenue/Days in the Period •  Industry Ratio: 48.9-52.17 (Schuhmann 2008)

•  Days in Revenue Outstanding = Total $ in Patient Unbilled/ Average Gross Daily Patient Revenue

•  Average Gross Daily Patient Revenue = Total Gross Patient Revenue/ Days in the Period •  Goal: Less than total bill hold days

Financial Reporting Function Ratio Analysis Ø Operating indicators

-  Days cash on hand, short sources -  Days cash on hand, all sources -  Days in accounts payable

Financial Reporting Function Cash on Hand:

–  Days Cash on Hand, Short-Term Sources = (Cash + Marketable Securities)/[(Total Expenses – Depreciation Expense)]/365 (Nowicki)

•  Industry Ratio: 7.86-39.83 (Schuhmann)

–  Days Cash on Hand, All Sources = (Cash + Marketable Securities + Unrestricted Long-Term Investments/[(Total Expenses – Depreciation Expense)]/365 (Nowicki)

»  Median: 139.8 (Moody’s)

–  - Days in Accounts Payable also known as Average Payment Period (Days):

•  (Total current liabilities x 365)/ (Total operating expenses – depreciation and amortization expenses)

Financial Reporting Function

Variance analysis Ø Three principal types of expense variance:

-  Price variance -  Volume variance -  Efficiency variance

Financial Reporting