week 2 HSM

Q.1 Financial Statements (150 words)

All financial statements are important, but most managers tend to have one that they look to first. If you were a potential contributor or investor looking at the financial statements of a local regional medical center, which document would you start with? Explain why.

Q.2 Summarize what you learn this week. (100 words)

Q.3 Write a reply to this discussion. (100 words)

All financial statements are essential for every organization because it allows managers to track performance, cash flow, operations, budgets, decision-making, etc. The critical components of the financial statements are the income statement, balance sheet, and statement of cash flows. Together, the income statement, balance sheet, and statement of cash flows present the organization's financial condition and the overall business results.

A balance sheet, also known as a statement of financial position, provides information on what a business is worth and helps business owners evaluate their company's financial standing. A balance sheet includes three major categories; the company's assets, equity, and liabilities. The assets category shows the items with substantial value, including property, equipment, and investments. Equity is the owners' residual interest in a company's assets, which can be increased by income earned or the issuance of new equity during the year. The amount of equity can be decreased by losses, additional payments, or repurchases during the year. The liabilities category is divided into current and long-term liabilities referring to debts and provides information on how powerful a company is to lenders over time. 

The cash flow and income statements are fundamental parts of a corporate balance sheet, all of which are a business's three primary financial statements. In relation to income statements, cash flow statements display how the changes in the balance sheet accounts affect a company's cash flow of operations over time.

The income statement is the most important because it shows a company's financial health over time. The income statement illustrates total revenue and expenses over some time so that the balance sheet can depict the summary of that information. The primary purpose of the income statement is to monitor how much money and profit the business generates and whether or not the company can maintain success. An income statement, a profit-and-loss statement, or an earnings statement shows a company's revenues, expenses, and profitability over time. This statement communicates the company's revenue from selling products and/or services and the costs to manage the business. It also shows the effectiveness of the business strategies set at the beginning of a financial period by helping owners decide whether they can generate profit by increasing revenues or decreasing costs

References:

Bragg, S. (2022, August 14). Which financial statement is the most important? — AccountingTools. Which Financial Statement Is the Most Important? &Mdash; AccountingTools. https://www.accountingtools.com/articles/which-financial-statement-is-the-most-important.html

CFA Institute. (2023). Retrieved from  https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/understanding-balance-sheets Links to an external site.

Week 2 reading

Chapter 3: Financial Analysis and Management Reporting

Welcome to Week 2!

 

This week, we will look at the financial analysis and continue to talk about management reporting. We will walk through the basic statements, such as the income statement, the balance sheet, and the most used ratios. Our discussion will include both horizontal and vertical analyses. Horizontal means across and refers to when we look at items over several years (each column of numbers being a year; going over or across gives a comparison to prior performance). Vertical analysis is up and down and is most common on the income statement where we set revenues as 100% and then analyze all the other captions as a percentage of revenue.

We will talk about the ratios calculated and what information is integral for good management reports. The Test Your Knowledge activity presented this week is a great way to learn about these ratios and begin speaking the lingo of the CFO!

In addition to ratios, we will examine operating indicators. Operating indicators are calculations that we use to evaluate our performance. The indicators vary by industry, but all industries use them. For example, retailers often measure revenue per square foot, a way of measuring their sales per size of the store. Hospitals may talk in terms of average revenue per patient day. Clinics may use average revenue per visit or measure annual visits per patient. The Test Your Knowledge activity also covers these key performance indicators.

Think about your own employer. Isn't there a key number or set of key numbers that are scrutinized most? Do you have dollar amounts or percentage amounts of variances that require an explanation to management? This week will show how those budget numbers we previously developed are important to evaluate our performance and our competitors.

I look forward to working with you in the discussion this week. There is much to learn in Week 2!

Course Objectives

Given that healthcare is pluralistic in the way it is financed, formulate a plan to address the issues surrounding thirdparty payments: payment methodologies of government healthcare programs, complex receivables management, managed care requirements, and corporate compliance plans.

Knowledge, Skills, and Abilities

· An analysis of pricing: How are hospital charges are determined?

· Determine how accounts receivable are different in healthcare and how to manage them.

· Demonstrate the importance of volume to price.

· Understand how third-party payments have evolved in healthcare, the growth of insurance, and government programs.

Financial Analysis

Introduction

When accountants, bankers, brokers, and investors discuss financial statements, they are talking about four basic statements: the balance sheet, the statement of operations, the statement of changes in retained earnings (the text says statement of changes in net assets, which is correct only for not-for-profits), and the statement of cash flows.

Those are the statements that are audited and available annually to the public. We are going to discuss each of them briefly, but we will talk more thoroughly about the additional reports generated internally that are used to manage the business.

The financial statement is used for ratio analysis and to evaluate the company in comparison with other companies in the industry. This is termed financial benchmarking. Remember that a single ratio by itself is virtually useless. It is only when several key ratios are reviewed and compared to companies in the same industry that we get meaningful information. We will provide examples later when describing specific ratios.

Financial Ratios and Subtypes of Ratios

As you know, a ratio is simply a mathematical calculation. If you draw a blueprint of your house on a scale of 1 inch to 1 foot, then you have a ratio on a 1/12 scale, because 1 inch of a drawing is 1 foot of a building. The most commonly quoted financial ratio is the price earnings ratio (PE ratio), so if you hear that a company has a PE ratio of 22, that tells you that a share of stock is priced at 22 times what the earnings per share are. It is more correctly a 22/1 ratio, but most people simply use the result 22.

There are liquidity ratios, profitability ratios, asset efficiency ratios, and capital structure ratios, and you need to understand each of these.

Liquidity measures the organization's ability to meet its current needs. Again, if using paychecks as an example, we can all relate to wanting our employer's assets to be liquid enough that our paychecks clear. One example is the current ratio, which is (current assets ÷ current liabilities). A result of 1 or better would indicate that it can meet its current needs without selling off an investment or long-term asset.

Profitability measures the results of the current operations. Operating margin is an example, being (operating income ÷ total operating revenue). This tells an organization if it will continue to survive and perhaps grow. Continued deficits will eventually lead to the dissolution of the organization.

Asset efficiency ratios are sometimes called turnover ratios. Inventory turnover would be an example, and it is calculated as (total income ÷ inventory). This tells us how many times we turned over inventory; a low number might mean we have too much stock on hand. In healthcare, however, you really can't give a rain check, so inventory management and not having stock outages is vital.

Capital structure ratios are used primarily to evaluate the size of our debt load. For not-for-profits, the amount financed through debt is higher than it is in for-profit corporations. Long-term debt compared to net assets is an example and would be determined in the ratio (long-term debt ÷ net assets). In a for-profit company, that would be (long-term debt ÷ equity).

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Operating Indicators

Operating indicators are not financial ratios, but they are similar because they are ratios that use numbers to help us evaluate our organizational performance. For example, HR departments often talk in terms of salary or benefits per FTE. An FTE is a full-time equivalent. A company that employs two full-time employees and two who work 20 hours each week means the company has three FTEs. It is converting headcount to the number of 40-hours-per-week employees those hours would equal. Salary per FTE is (total salaries ÷ FTEs).

There are many different operating indicators that we use in healthcare (including the insurers). Average length of stay, days per thousand, and so on are all important in managing the business, because healthcare is a business with high fixed costs, and volume is the key to being profitable.

Notes to Financial Statements

Notes to the financial statements are very important and sometimes overlooked. Notes regarding key accounting policies are required by auditors and provide important information. As a healthcare senior manager, you will be facing outside auditors every year, and you will need to learn how to work effectively with them. Experienced CEOs and CFOs will tell you to keep the auditors happy, make it easy for them to do their jobs, and then escort them to the door just as quickly as possible. When things are in good order and easy to locate and understand, the auditors will be with you for several days. When things are confusing or difficult, they may be around for several weeks poking into every aspect of the business. Which would you prefer?

Taking a few examples that relate well to hospitals and clinics, the policy used to recognize revenue is very important, and the method of depreciation used can greatly impact the appearance of hospital financials. The American Hospital Association publishes a manual indicating the approximate useful life of each piece of medical technology, and that schedule should be followed for depreciating assets. Pension and retiree benefit calculation methods are also very important. Above all in modern hospitals, the process for determining and writing off bad debt must be clearly explained in the notes.

Taking one specific example regarding hospital inventory, generally accepted accounting principles (GAAP) do allow some leeway in recording information as long as the organization is consistent once it picks a method. For example, inventory can be FIFO or LIFO. FIFO and LIFO are accounting methods for managing inventory and funds tied up in inventory of products, supplies, and the like.

FIFO refers to first in, first out. This means that the oldest inventory items are shown as sold first. This does not necessarily mean that the exact oldest physical item has been identified and sold. FIFO is just an inventory method.

LIFO refers to last in, first out. This means that the newest purchased items are shown as sold first. Again, this does not really mean that the exact newest physical item has been identified and sold. LIFO is also an accounting method.

We even have a name for the difference between FIFO and LIFO. We term this the LIFO reserve. This difference approximates the amount by which a hospital or clinic's taxable income is deferred by using the LIFO method instead of FIFO. Essentially, the hospital or clinic delays paying taxes by using LIFO, and any CFO will tell you that delaying the payment of taxes is a good thing.

I am pretty sure that this lecture has brought home at least one point for you: There are a lot of new terms and acronyms in health services finance. This week, we have created an activity to help you learn that terminology. It is called a Test Your Knowledge. Be sure to check it out, because it will help you assimilate the new terminology so that you will understand what the CFO and auditors are saying at your hospital board meeting.