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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 organization’s 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

  1. Industry Analysis
  2. Firm Strategy Analysis
  3. Accounting Quality Analysis
  4. Financials Review
  5. Forecasting
  6. 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. (2017). Financial reporting, financial statement analysis and valuation (9th ed.). Boston, MA: Cengage Learning.

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Cleverley, W. O., & Cleverley, J. O. (2017). Essentials of healthcare finance (8th ed.). Burlington, MA: Jones & Bartlett Learning.

Klammer, T. (2018). Statement of cash flows: Preparation, presentation, and use. Hoboken, NJ: Wiley.

Reeve, J. M., Duchac, J., & Warren, C. S. (2016). Financial & managerial accounting (14th ed.). Boston, MA: Cengage Learning.

Smith, D. L., Calabrese, D. T. D., & Finkler, S. A. (2018). Financial management for public, health, and not-for-profit organizations (6th ed.). Thousand Oaks, CA: SAGE Publications.

Vona, L. W. (2017). 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. (2016). Intermediate accounting: reporting and analysis (2nd ed.). Boston, MA: Cengage Learning.

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StudyCorgi. (2022, April 25). Financial Analysis in Healthcare Organizations. Retrieved from https://studycorgi.com/financial-analysis-in-healthcare-organizations/

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