Financial Analysis in Healthcare Organizations
Introduction
Financial analysis relies on accurate data
This information is too complex to be useful
It is organized into simpler financial statements
They can be analyzed to judge business performance
Principal Financial Statements
Statement of operations
Balance sheet
Statement of cash flows
Statement of changes in net assets
Statement of Operations
Lists the income and expenses
Only discusses operations related to the processes of the organization
Used to judge the overall performance of the organization
Useful Statement of Income
Metrics
Net profit
Profit margin
Earnings per share
Times interest earned
Statement of Operations Issues
Does not distinguish between cash and other methods of payment
Potential for misrepresentation
Fraudulent increase in perceived profitability
Balance Sheet
Describes the organizations current financial position
Lists its resources (assets) as well as outstanding claims (liabilities)
Examples of assets are cash and equipment
Examples of liabilities are short-term debt and yet unpaid taxes
The difference between the two is called shareholders equity
Useful Balance Sheet Metrics
Current ratio
Quick ratio
Working capital
Debt-to-equity ratio
Balance Sheet Issues
Some assets are challenging to value
Can be used to conceal theft
Potential for misrepresentation
Statement of Cash Flows
Demonstrates the flow of cash in and out of the company
Only discusses cash, not equivalents
Reports the current ability of the company to make payments
Useful Statement of Cash Flows
Metrics
Free cash flow
Current liability coverage
Cash flow coverage
Statement of Cash Flows Issues
Prone to mistakes
Outstanding account manipulation
Miscategorization of cash flows
Statement of Changes in Net Assets
Describes the changes in the net assets of the organization
Used to clarify items that may not be apparent from the statement of operations
Often required for not-for-profit healthcare organizations
Useful Statement of Changes in
Net Assets Metrics
No frequently used ratios
Net asset change is similar to net profit
Positive changes are indicative of satisfactory management
Statement of Changes in Net Assets Issues
Similar issues apply as with the balance sheet
Organizations may aim to inflate their assets to appear viable
The purpose of doing so would be to avoid scrutiny and attract donors
Financial Analysis Elements
Used to formulate future strategy
Performed by the accounting department in conjunction with top management
Relies on financial statements
The Six-Step Financial Analysis
Framework
Industry Analysis
Firm Strategy Analysis
Accounting Quality Analysis
Financials Review
Forecasting
Valuation
Industry and Firm Strategy Analyses
The industry analysis considers competition
The firm strategy analysis discusses competitive advantages
They have to be significant and sustainable
Accounting Quality Analysis and Financials Review
It is vital to consider the potential mistakes and issues in the financial statements
Once quality is verified, the review can begin
Ratios and analysis measures can be used to understand specific performance determinants
Forecasting and Valuation
Project future performance
Adjust planning based on the results
Value estimations may not be required for a not-for-profit
Conclusion
There are four essential financial statements for a not-for-profit healthcare enterprise
They should be used for financial strategy formulation together
Their formulation is a step in financial analysis, which is a convoluted process
References
Baginski, S. P., Wahlen, J. M., & Bradshaw, M. (207). Financial reporting, financial statement analysis and valuation (9th ed.). Boston, MA: Cengage Learning.
Cleverley, W. O., & Cleverley, J. O. (207). Essentials of healthcare finance (8th ed.). Burlington, MA: Jones & Bartlett Learning.
Klammer, T. (208). Statement of cash flows: Preparation, presentation, and use. Hoboken, NJ: Wiley.
Reeve, J. M., Duchac, J., & Warren, C. S. (206). Financial & managerial accounting (4th ed.). Boston, MA: Cengage Learning.
Smith, D. L., Calabrese, D. T. D., & Finkler, S. A. (208). Financial management for public, health, and not-for-profit organizations (6th ed.). Thousand Oaks, CA: SAGE Publications.
Vona, L. W. (207). Fraud data analytics methodology: The fraud scenario approach to uncovering fraud in core business systems. Hoboken, NJ: Wiley.
Wahlen, J. M., Jones, J. P., & Pagach, D. (206). Intermediate accounting: reporting and analysis (2nd ed.). Boston, MA: Cengage Learning.