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INTRODUCTON TO
HEALTHCARE
FINANCE
Ahmad Thanin
OUTLINE
Module 1
•The key financial statements
Module 2
•Assessing Financial Performance
Module 3
•Ratio analysis of financial statements
Module 4
•Profitability Ratios.
Module 5
•Performance Ratios
Module 6
•Investment Ratios
Module 7
•HEALTHCARE FINANCE
Module 8
•Additional Financial Terminologies
Module 1
The key financial statements
Key Questions
What does your
company own, and what
does it owe to others?
What are its sources of
revenue?
How has it spent its
money?
How much profit has it
made?
What is the state of its
financial health?
Key Answers
• the Balance Sheet,
• the Income Statement, and
• the Cash Flow
You can answer those questions by turning to the three mainfinancial statements:
• Executives use them to assess performance and identify areas for action.
• Shareholders look at them to keep tabs on how well their capital is being managed.
• Outside investors use them to identify opportunities.
• Lenders and suppliers routinely examine them to determine the creditworthiness of the companies with
which they deal.
These are the essential documents of business.
Every manager, no matter where
he or she sits in the organization,
should have a solid grasp of the
basic statements
The Balance Sheet
• what the company owns (its assets).
• what it owes (its liabilities).
• and its book value, or net worth (also called
owners’ equity, or shareholders’ equity).
The Balance Sheet shows:
Assets
Assets comprise all the
physical resources a company
can put to work in the service
of the business.
This category includes
Tangible and Intangible
Assets
Tangible Assets
• Cash, cash equivalent and banks
• Financial Instruments (stocks and
bonds)
• Accounts receivables
• Bad debt provisions
• Inventory & Stock (Raw materials,
Work in process, Finished Goods)
• Prepaid expenses
Current Assets
Tangible Assets
• Properties (Lands, Buildings, etc . . . )
• Furnitures (Factory, offices, warehouse)
• Equipment's (Factory, offices, warehouse)
• Machineries and Robots
• Vehicles
• Others
Fixed Assets
• Fixed Deposits (Long term, Margins, Cash
collateral)
• Long term investments
Other Assets
Intangible
Assets
Non-Current Assets
•Goodwill
•Patent
•Copyright
•Brand name
Liabilities
Liabilities are debts to banks,
suppliers and other creditors.
Current Liabilities
• Accrued payroll
• Loans and notes payable to banks
• Current portion of long term debt
• Income taxes payable
• Accounts payable
• Other accrued liabilities
Liabilities
Long Term
Liabilities
Lease contracts
Long term debts
Corporate bonds
Loan from
shareholders
Always less
current portion
of long-term debt
Equity
Owners’ equity is what’s left after you subtract total liabilities from
total assets.
Equity
Capital Stock
Contributed Capital
Retained earnings
How Balance
Sheet Looks
Like?
Balance Sheet Philosophy
Assets – Liabilities = Owners’ Equity
Assets = Liabilities + Owners’ Equity
The balance sheet shows assets on one side of the ledger, liabilities and
owners’ equity on the other.
It’s called a balance sheet because the two sides must always balance. S
Assets = S(Liabilities + Equity).
What should the Balance Sheet reflect
Working Capital = Current Assets – Current Liabilities
Financial Leverage = Total Debts / Stock Capital in %
The Income Statement
The income statement shows cumulative business results within a defined time
frame, such as a quarter or a year.
It tells you whether the company is making a profit or a loss— that is, whether
it has positive or negative net income (net earnings)—and how much.
This is why the income statement is often referred to as the profit-and-loss
statement, or P&L.
The income statement also tells you the company’s revenues and expenses
during the time period it covers.
The Income Statement
we can represent the contents of the income statement with a
simple equation:
Revenues – Expenses = Net Income
(A positive result refers to Profits, a negative result refers to Losses).
operating expenses, the salaries of employees, office rents, sales and marketing costs, and other costs not directly
related to making a product or delivering a service.
Depreciation appears on the income statement as an expense, even though it involves no out-of-pocket payment.
But it’s a way of allocating the cost of an asset over the asset’s estimated useful life.
The Income
Statement
The Cash Flow Statement
The cash flow statement is the least used—and least
understood— of the three essential statements.
It shows in broad categories how a company acquired and
spent its cash during a given span of time.
Expenditures show up on the statement as negative
figures, and sources of income figures are positive.
The bottom line in each category is simply the net total of
inflows and outflows, and it can be either positive or
negative.
The Cash Flow Statement
The statement has three major categories:
Operating activities, or operations, refers to cash generated by, and used in, a
company’s ordinary business operations.
It includes everything that doesn’t explicitly fall into the other two categories.
Investing activities covers cash spent on capital equipment and other investments
(outgoing), and cash realized from the sale of such investments (incoming).
Financing activities refers to cash used to reduce debt, buy back stock, or pay
dividends.
The Cash Flow
Statement
Summery
Balance sheet, income statement,
and cash flow statement offer
three perspectives on a company’s
financial performance. They tell
three different but related stories
about how well your company is
doing financially
Summery
The balance sheet shows a
company’s financial position
at a specific point in time. It
provides a snapshot of its
assets, liabilities, and equity
on a given day.
The income statement
shows the bottom line. It
indicates how much profit
or loss was generated over a
period of time—usually a
month, a quarter, or a year.
Summery
The cash flow statement tells
where the company’s cash
came from and where it went.
It shows the relationship
between net profit and the
change in cash recorded from
one balance sheet to the next.
Together, these financial
statements can help you
understand what is going on in
your company.
Module 2
Assessing Financial Performance
Introduction
1- The ability to evaluate the Financial Performance of an
Organization is a VALUABLE SKILL to
• Any Manager,
• At Any Position.
2- Very few Managers take the time to and trouble to learn how to
make a simple Financial Assessment of their
• Home Finance
• Organization
• Personal Finance
Introduction
3- Financial Ratios are the KEY to
assess the Financial
4- Key FINANCIAL RATIOS can help in
interpreting Financial
5- Performance of an organization
6- Information for a
Better/Optimized Decision Making
What is a Key
Financial Ratio
A Key Financial Ratio “KFR” is a figure obtained from the
result of a calculation
The Calculation consists on comparing some values taken
from the Balance Sheet, Income Statement and Cash Flow
Statement
But KFR usually cannot give any indication if they are not
Benchmarked
Benchmark with
•Past Performance of the Company
•Another PEER Organization
Benchmark
Key Financial
Ratio
“KFR” allow for useful
comparison between
Different time periods
within the same
Organization
Organizations in the
same industry
An Organization and its
Industry Average
Types of Key
Financial Ratio
There are
several
types of
“KFR”
•Solvency
•Profitability
•Performance
•Investment
Module 3
Ratio analysis of financial
statements
Type of Ratio Analysis
Liquidity
Ratio
Current Ratio
Quick Ratio
Leverage
Ratio
Debt Equity
Ratio.
total outside
liberty ratio
Solvency
Ratio
Interest
coverage
Ratio.
DSCR.
Return
Ratio
Return on
capital
employed.
Return on
Assets.
Return on
Equity
(Debt service coverage ratio)
What Solvency Ratios mean?
• An Organization is SOLVENT when it can PAY its DEBT
when it falls DUE
• Meaning the Organization has enough WORKING
CAPITAL to PAY its LIABILITES
• Solvency refers to Level of LIQUIDITY
• Liquidity is CASH
Other definition
leverage ratios, are one of many ratios that can help you to assess the financial
health of a business.
Solvency ratios measure a company’s ability to meet its long-term financial
obligations. They do this by comparing a company’s level of debt against
earnings, assets, and equity.
Solvency ratios are commonly used by lenders or investors to determine the
ability of a company to pay back its debts.
Which Solvency
Ratios shall we use?
• There are TWO Ratios that can help you to
determine whether your Organization is SOLVENT
or NOT (Liquidity Ratio)
• Current Ratio
• Quick Ratio
Quick Ratio
• The Quick Ratio or Acid Ratio measures Liquidity precisely than Current Ratio
• It doesn’t include Stock within Current Assets
Current Ratio
• The Current Ratio looks at the relationship between Current Assets
and Current Liabilities
• Current means Short Term
• Short Term means payable within One Year
Types of Solvency Ratio
There are many different solvency ratios in use today, and we’ll cover the important ones below.
But there is one solvency ratio that is the key solvency ratio
What is a Good
Solvency Ratio?
What is considered a good solvency ratio will differ from
industry to industry. However, generally, a solvency ratio
of 20% and higher is considered to be good.
Summary
• Liquidity ratios provide a great way to
determine if your company can remain
solvent in the short-term. But it is solvency-
ratios that provide a great way to check your
long-term financial health. They help you
identify potential financial concerns in
advance before they become a major
problem.
• There are many different solvency ratios in
existence. They are typically used by lenders
to determine the creditworthiness of your
business.
Module 4
Profitability Ratios
What
Profitability
Ratios
mean?
Profitability Ratios measure the Organization’s
use of ASSETS and CONTROL OF EXPENSES to
generate acceptable RATE of RETURN
You can see if an Organization is Profitable
simply by Looking at the Income Statement, but
you need to put the PROFIT into perspective
Some Profitability Questions:
• Is the Profit Growing in Proportion to the size of the
Organization?
• Is the organization making as much Profit on New Sales as
on Existing Sales?
• Is the Organization as Profitable as its PEERS?
Measure Profitability Ratios
There are
three ways
to measure
Profitability:
• Gross Profit Margin “GPM”
• Net Profit Margin “NPM”
• Return On Assets “ROA”
Gross Profit Margin
One of the Most
commonly used
Ratios
It looks at the
Gross Profit as a
Percentage of
Turnover (Sales)
Both figures come
from the Income
Statement
Mark-Up
• Many people confuse between GPM and Mark-Up
• Mark up is the Figure, or the Percentage added by the Management
to cover the cost of goods and the required profit margin for a
product or service
Net Profit Margin
• It looks at the Net Profit as a Percentage of Turnover (Sales)
• Both figures come from the Income Statement
• Net Profit is the Result (figure) left after deducting all Operating and
Non-Operating Expenses from Total revenues or Income
Net Profit Margin
• Decrease your Costs
• Increase your Revenues and Sales
To improve your Net Profit Margin, you can:
Return On
Assets
ASSETS ARE THE MAJOR
COMPONENT THAT NEED TO BE
IN PLACE FOR
THE ORGANIZATION TO OPERATE
PROPERLY
WE CAN MEASURE THE LEVEL OF
PROFIT COMPARED TO THE
VALUE OF ASSETS INVESTED IN
THE ORGANIZATION
Return On Assets
Return On Assets
Net Assets represent the Capital Invested in the Organization
Module 5
Performance Ratios
What
Performance
Ratios mean?
Performance means Efficiency and Effectiveness of
the Organization
Is the Organization making the sort of Profit that it
has in the PAST?
• LESS = Non-Performing
• EQUAL = No Progress or Development – Stagnation / Stability
• MORE = Growth
Is the Organization making the sort of Profit that
other PEERS are making?
• LESS = Non-Performing comparing with Peers
• EQUAL = Stability – in Line with the Market and Peers
• MORE = Strong Performance – Better than Peers and
market Trends
Is an Organization Performing?
There are several Ratios that we can use to measure how an organization
is performing in terms Efficiency, of Profitability and these Ratios are:
• Gearing Ratio
• Number of Days Credit Granted
• Number of Days Credit Taken
• Stock Turnover
• Overheads as a Percentage of turnover
Gearing This Ratio looks at the total Borrowing
divided by the Net Worth of the Organization
Number of Days Credit Granted
• This Ratio measures the effectiveness of the Organization’s Debt Collection
• It sets out the relationship between debtors and sales made on credit
• It show how quickly clients are paying their invoices
Number of Days Credit Taken
• This Ratio measures the Effectiveness of the Organization’s Liabilities Payment
• It sets out the relationship between creditors and purchases made on credit
• It show how quickly the organization is paying its liabilities
Stock Turnover
This Ratio measures
how quickly the
organization turns
over Stock into Sales
This is another
Efficiency measure
It shows the Sales
Efficiency in the
Market
Normally the
definition of Stock
includes
Finished Goods
Work in Process
Raw Materials
Stock Turnover
Overheads as
Percentage of
Turnover
This Ratio measures how Efficiently the
Organization is running its Operation.
This is an additional Efficiency measure
Normally the definition of Overheads refers
to Operating Expenses and includes:
• Rent
• Utility Bills
• Wages
• Administrative Expenses
Overheads as Percentage of
Turnover
Module 6
Investment Ratios
What
Investment
Ratios mean?
Investment Ratios measure investor response to owing and
organization’s Stock
Investment Ratios measure the Cost of issuing Stock
They are concerned with the Return On Investment
“ROI”
They are concerned with the relationship between the
Return and the Value of the investment in the Organization
Does the organization have Investment Potential?
These are the most useful Ratios
The Accounting Ratios that Focus on Investment Potential include:
Price / Earnings
Ratio “PER”
Price-to-Book
Ratio “PBR”
PE to Growth
Ratio “PEG”
Dividend Yield
“DY”
Price / Earnings Ratio
This Ratio is one of the most helpful
It is usually used to compare the Organization with:
• Peers
• Industry Sector
• Overall Market
Price-to-Book Ratio
This Ratio represents the value of an Organization if it
is Broken up and Sold
It usually includes anything that can be sold such as:
• Equipment
• Buildings and Lands
• Stock Holding and Bonds
Price/Earning to Growth Ratio
This Ratio illustrates the relationship between stock price, Earning
Per Share “EPS”, and organization’s expected growth rate
Used in Management discussions for Strategic growth
considerations
It is widely used indicator of a Stock’s potential value
Dividend Yield
This DY is used to calculate the earning on investment
It is expressed in Percentage
It is considered equivalent to the Interest Rate on the Money
Invested
Module 7
HEALTHCARE FINANCE
Healthcare managers at all
levels must understand the
fundamentals of finance and
how that knowledge is used to
enhance the financial well-
being of the institution
What Does the Healthcare Manager Need to Know to
understand financial management?
1) The original records
2) The information system
3) The accounting system
4) The reporting system.
DEFINING HEALTHCARE FINANCE
Healthcare finance can have many different definitions, depending on the setting. healthcare
finance encompasses the accounting and financial management functions of healthcare
organizations.
Accounting involves the measurement, in financial terms, of a business’s operations and
financial status, while financial management (corporate finance) involves the application of
theory and concepts developed to help managers make better decisions.
In practice, the two functions blend, with accounting generating the data needed to make
sound decisions and financial management providing the framework for those decisions.
THE ROLE OF FINANCE IN HEALTH SERVICES
ORGANIZATIONS
The primary role of finance in health services
organizations is to plan for, acquire, and use
resources to maximize the efficiency of the
organization.
This role is implemented through specific
activities such as planning and budgeting.
FINANCE ACTIVITIES
Planning and
Budgeting
Managing
Financial
Operation
Financing
decisions
Capital
investment
decisions.
Financial
reporting
Contract
management
Financial risk
management
The Four C’s activities can be summarized by the four C’s
Costs.
• Costs must be continuously monitored to ensure that they are not excessive for the number of services
provided.
Cash.
• Businesses must have sufficient cash on hand to meet payment obligations as they occur.
Capital.
• Businesses must raise the capital (money) necessary to buy the facilities and equipment needed to
provide services.
Control.
• Businesses must control their resources to ensure that they are used wisely.
Importance of Finance over Time
When most health services organizations were reimbursed based
on costs incurred, the role of finance was secondary.
Today, however, the finance function has increased in importance.
Note that there are no unimportant functions in health services
organizations.
• Operations, human resources, facilities, and so on are all essential to mission
accomplishment
Finance Department Structure
Chief
Financial
Officer (CFO)
Treasure
Capital
Employment
Debt
Management
Financial Risk
Management
Capital
Acquisition
Comptroller
Budgeting Reporting Payables
Financial
Operations
Financial
Management
Elements
•The financial manager identifies the steps that must be taken to
accomplish the organization’s objectives. Thus, the purpose is to
identify objectives and then to identify the steps for accomplishing
these objectives.
Planning.
•The financial manager makes sure that each area of the
organization is following the plans that have been established.
Controlling.
•The financial manager decides how to use the resources of the
organization to most effectively carry out the plans that have been
established.
Organizing.
•The financial manager makes choices among available alternatives.
Decision making.
Health Services Settings
Health services are provided by numerous types of
organizations in many different settings. include the
following settings
Hospital
(inpatient)
care
Ambulatory
(outpatient)
care
Long-term
care
Integrated
delivery
systems
Home
Healthcare
Current Challenges
Surveys of
healthcare
managers reveal
the following
concerns:
Financial challenges
• Level of reimbursement
• Bad debt losses
• Billing and collections process
(revenue cycle)
• Capital acquisition (raising money)
Balancing clinical and financial
issues
How does finance work in the Healthcare
Business?
And because the business of healthcare is service, the explanation, and illustration within
this report focus on the practice of financial management in the service industry.
The healthcare industry is a service industry, its essential business is the delivery of
healthcare services.
The real key to understanding finance is understanding the various pieces and the
relationship to each other.
The managers within a healthcare organization will generally have
one of three views:
• managers generally work with finance on a daily basis.
• The reporting function is part of their responsibility.
• They usually perform much of the strategic planning for the organization.
The Financial view.
• These managers generally work with the system of the organization.
The Process views.
• These managers generally are responsible for service delivery and have direct interaction with the
patients and are responsible for clinical outcomes of the organization.
The Clinical view.
Module 8
Additional Financial
Terminologies
Financial Terminologies
• Subtracting current liabilities from current assets gives you the
Organization’s net working capital, or the amount of money tied
up in current operations
Working Capital
• It is a component of working capital that directly affects many
non-financial managers
Inventory
Financial Terminologies
• The use of borrowed money to acquire an asset is called
financial leverage. People say that a company is highly
leveraged when the percentage of debt on its balance sheet
is high relative to the capital invested by the owners
Financial
leverage
• Revenues – Expenses = Net Income
Net
Income
Financial Terminologies
• They include the salaries of employees, office rents, sales and
marketing costs, and other costs not directly related to making a
product or delivering a service
Operating Expenses
• appears on the income statement as an expense, even though it
involves no out-of-pocket payment. It’s a way of allocating the cost of
an asset over the asset’s estimated useful life
Depreciation
Financial Terminologies
• The discount rate at which the net present value of an investment
equals zero
EBIT
• Earnings before interest and taxes divided by interest expense.
Creditors use this ratio to gauge a company’s ability to make future
interest payments in the face of fluctuating operating results
Interest Coverage Ratio
Financial Terminologies
Internal Rate of Return (IRR)
• They include the salaries of employees, office rents, sales
and marketing costs, and other costs not directly related to
making a product or delivering a service
Operating Budget
• A projected target for performance in revenues, expenses,
and operating income
Financial Terminologies
• The monetary value today of a future payment
discounted at some annual compound interest rate
Present Value (PV)
• The present value of one or more future cash flows less
any initial investment costs
Net Present Value (NPV)
Financial Terminologies
• Annual net profits left after payment of dividends that accumulate on a
company’s balance sheet
Retained Earnings
• The difference between actual and expected results in the budget. A
variance can be favorable, when the actual results are better than
expected, or unfavorable, when the actual results are worse than expected
Variance
THANK YOU

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INTRODUCTON TO HEALTHCARE FINANCE

  • 2. OUTLINE Module 1 •The key financial statements Module 2 •Assessing Financial Performance Module 3 •Ratio analysis of financial statements Module 4 •Profitability Ratios. Module 5 •Performance Ratios Module 6 •Investment Ratios Module 7 •HEALTHCARE FINANCE Module 8 •Additional Financial Terminologies
  • 3. Module 1 The key financial statements
  • 4. Key Questions What does your company own, and what does it owe to others? What are its sources of revenue? How has it spent its money? How much profit has it made? What is the state of its financial health?
  • 5. Key Answers • the Balance Sheet, • the Income Statement, and • the Cash Flow You can answer those questions by turning to the three mainfinancial statements: • Executives use them to assess performance and identify areas for action. • Shareholders look at them to keep tabs on how well their capital is being managed. • Outside investors use them to identify opportunities. • Lenders and suppliers routinely examine them to determine the creditworthiness of the companies with which they deal. These are the essential documents of business.
  • 6. Every manager, no matter where he or she sits in the organization, should have a solid grasp of the basic statements
  • 7. The Balance Sheet • what the company owns (its assets). • what it owes (its liabilities). • and its book value, or net worth (also called owners’ equity, or shareholders’ equity). The Balance Sheet shows:
  • 8. Assets Assets comprise all the physical resources a company can put to work in the service of the business. This category includes Tangible and Intangible Assets
  • 9. Tangible Assets • Cash, cash equivalent and banks • Financial Instruments (stocks and bonds) • Accounts receivables • Bad debt provisions • Inventory & Stock (Raw materials, Work in process, Finished Goods) • Prepaid expenses Current Assets
  • 10. Tangible Assets • Properties (Lands, Buildings, etc . . . ) • Furnitures (Factory, offices, warehouse) • Equipment's (Factory, offices, warehouse) • Machineries and Robots • Vehicles • Others Fixed Assets • Fixed Deposits (Long term, Margins, Cash collateral) • Long term investments Other Assets
  • 12.
  • 13. Liabilities Liabilities are debts to banks, suppliers and other creditors. Current Liabilities • Accrued payroll • Loans and notes payable to banks • Current portion of long term debt • Income taxes payable • Accounts payable • Other accrued liabilities
  • 14. Liabilities Long Term Liabilities Lease contracts Long term debts Corporate bonds Loan from shareholders Always less current portion of long-term debt
  • 15. Equity Owners’ equity is what’s left after you subtract total liabilities from total assets. Equity Capital Stock Contributed Capital Retained earnings
  • 17. Balance Sheet Philosophy Assets – Liabilities = Owners’ Equity Assets = Liabilities + Owners’ Equity The balance sheet shows assets on one side of the ledger, liabilities and owners’ equity on the other. It’s called a balance sheet because the two sides must always balance. S Assets = S(Liabilities + Equity).
  • 18. What should the Balance Sheet reflect Working Capital = Current Assets – Current Liabilities Financial Leverage = Total Debts / Stock Capital in %
  • 19. The Income Statement The income statement shows cumulative business results within a defined time frame, such as a quarter or a year. It tells you whether the company is making a profit or a loss— that is, whether it has positive or negative net income (net earnings)—and how much. This is why the income statement is often referred to as the profit-and-loss statement, or P&L. The income statement also tells you the company’s revenues and expenses during the time period it covers.
  • 20. The Income Statement we can represent the contents of the income statement with a simple equation: Revenues – Expenses = Net Income (A positive result refers to Profits, a negative result refers to Losses). operating expenses, the salaries of employees, office rents, sales and marketing costs, and other costs not directly related to making a product or delivering a service. Depreciation appears on the income statement as an expense, even though it involves no out-of-pocket payment. But it’s a way of allocating the cost of an asset over the asset’s estimated useful life.
  • 22. The Cash Flow Statement The cash flow statement is the least used—and least understood— of the three essential statements. It shows in broad categories how a company acquired and spent its cash during a given span of time. Expenditures show up on the statement as negative figures, and sources of income figures are positive. The bottom line in each category is simply the net total of inflows and outflows, and it can be either positive or negative.
  • 23. The Cash Flow Statement The statement has three major categories: Operating activities, or operations, refers to cash generated by, and used in, a company’s ordinary business operations. It includes everything that doesn’t explicitly fall into the other two categories. Investing activities covers cash spent on capital equipment and other investments (outgoing), and cash realized from the sale of such investments (incoming). Financing activities refers to cash used to reduce debt, buy back stock, or pay dividends.
  • 25. Summery Balance sheet, income statement, and cash flow statement offer three perspectives on a company’s financial performance. They tell three different but related stories about how well your company is doing financially
  • 26. Summery The balance sheet shows a company’s financial position at a specific point in time. It provides a snapshot of its assets, liabilities, and equity on a given day. The income statement shows the bottom line. It indicates how much profit or loss was generated over a period of time—usually a month, a quarter, or a year.
  • 27. Summery The cash flow statement tells where the company’s cash came from and where it went. It shows the relationship between net profit and the change in cash recorded from one balance sheet to the next. Together, these financial statements can help you understand what is going on in your company.
  • 29. Introduction 1- The ability to evaluate the Financial Performance of an Organization is a VALUABLE SKILL to • Any Manager, • At Any Position. 2- Very few Managers take the time to and trouble to learn how to make a simple Financial Assessment of their • Home Finance • Organization • Personal Finance
  • 30. Introduction 3- Financial Ratios are the KEY to assess the Financial 4- Key FINANCIAL RATIOS can help in interpreting Financial 5- Performance of an organization 6- Information for a Better/Optimized Decision Making
  • 31. What is a Key Financial Ratio A Key Financial Ratio “KFR” is a figure obtained from the result of a calculation The Calculation consists on comparing some values taken from the Balance Sheet, Income Statement and Cash Flow Statement But KFR usually cannot give any indication if they are not Benchmarked Benchmark with •Past Performance of the Company •Another PEER Organization
  • 32. Benchmark Key Financial Ratio “KFR” allow for useful comparison between Different time periods within the same Organization Organizations in the same industry An Organization and its Industry Average
  • 33. Types of Key Financial Ratio There are several types of “KFR” •Solvency •Profitability •Performance •Investment
  • 34. Module 3 Ratio analysis of financial statements
  • 35. Type of Ratio Analysis Liquidity Ratio Current Ratio Quick Ratio Leverage Ratio Debt Equity Ratio. total outside liberty ratio Solvency Ratio Interest coverage Ratio. DSCR. Return Ratio Return on capital employed. Return on Assets. Return on Equity (Debt service coverage ratio)
  • 36. What Solvency Ratios mean? • An Organization is SOLVENT when it can PAY its DEBT when it falls DUE • Meaning the Organization has enough WORKING CAPITAL to PAY its LIABILITES • Solvency refers to Level of LIQUIDITY • Liquidity is CASH
  • 37. Other definition leverage ratios, are one of many ratios that can help you to assess the financial health of a business. Solvency ratios measure a company’s ability to meet its long-term financial obligations. They do this by comparing a company’s level of debt against earnings, assets, and equity. Solvency ratios are commonly used by lenders or investors to determine the ability of a company to pay back its debts.
  • 38. Which Solvency Ratios shall we use? • There are TWO Ratios that can help you to determine whether your Organization is SOLVENT or NOT (Liquidity Ratio) • Current Ratio • Quick Ratio
  • 39. Quick Ratio • The Quick Ratio or Acid Ratio measures Liquidity precisely than Current Ratio • It doesn’t include Stock within Current Assets
  • 40. Current Ratio • The Current Ratio looks at the relationship between Current Assets and Current Liabilities • Current means Short Term • Short Term means payable within One Year
  • 41. Types of Solvency Ratio There are many different solvency ratios in use today, and we’ll cover the important ones below. But there is one solvency ratio that is the key solvency ratio
  • 42. What is a Good Solvency Ratio? What is considered a good solvency ratio will differ from industry to industry. However, generally, a solvency ratio of 20% and higher is considered to be good.
  • 43. Summary • Liquidity ratios provide a great way to determine if your company can remain solvent in the short-term. But it is solvency- ratios that provide a great way to check your long-term financial health. They help you identify potential financial concerns in advance before they become a major problem. • There are many different solvency ratios in existence. They are typically used by lenders to determine the creditworthiness of your business.
  • 45. What Profitability Ratios mean? Profitability Ratios measure the Organization’s use of ASSETS and CONTROL OF EXPENSES to generate acceptable RATE of RETURN You can see if an Organization is Profitable simply by Looking at the Income Statement, but you need to put the PROFIT into perspective Some Profitability Questions: • Is the Profit Growing in Proportion to the size of the Organization? • Is the organization making as much Profit on New Sales as on Existing Sales? • Is the Organization as Profitable as its PEERS?
  • 46. Measure Profitability Ratios There are three ways to measure Profitability: • Gross Profit Margin “GPM” • Net Profit Margin “NPM” • Return On Assets “ROA”
  • 47. Gross Profit Margin One of the Most commonly used Ratios It looks at the Gross Profit as a Percentage of Turnover (Sales) Both figures come from the Income Statement
  • 48. Mark-Up • Many people confuse between GPM and Mark-Up • Mark up is the Figure, or the Percentage added by the Management to cover the cost of goods and the required profit margin for a product or service
  • 49. Net Profit Margin • It looks at the Net Profit as a Percentage of Turnover (Sales) • Both figures come from the Income Statement • Net Profit is the Result (figure) left after deducting all Operating and Non-Operating Expenses from Total revenues or Income
  • 50. Net Profit Margin • Decrease your Costs • Increase your Revenues and Sales To improve your Net Profit Margin, you can:
  • 51. Return On Assets ASSETS ARE THE MAJOR COMPONENT THAT NEED TO BE IN PLACE FOR THE ORGANIZATION TO OPERATE PROPERLY WE CAN MEASURE THE LEVEL OF PROFIT COMPARED TO THE VALUE OF ASSETS INVESTED IN THE ORGANIZATION
  • 53. Return On Assets Net Assets represent the Capital Invested in the Organization
  • 55. What Performance Ratios mean? Performance means Efficiency and Effectiveness of the Organization Is the Organization making the sort of Profit that it has in the PAST? • LESS = Non-Performing • EQUAL = No Progress or Development – Stagnation / Stability • MORE = Growth Is the Organization making the sort of Profit that other PEERS are making? • LESS = Non-Performing comparing with Peers • EQUAL = Stability – in Line with the Market and Peers • MORE = Strong Performance – Better than Peers and market Trends
  • 56. Is an Organization Performing? There are several Ratios that we can use to measure how an organization is performing in terms Efficiency, of Profitability and these Ratios are: • Gearing Ratio • Number of Days Credit Granted • Number of Days Credit Taken • Stock Turnover • Overheads as a Percentage of turnover
  • 57. Gearing This Ratio looks at the total Borrowing divided by the Net Worth of the Organization
  • 58. Number of Days Credit Granted • This Ratio measures the effectiveness of the Organization’s Debt Collection • It sets out the relationship between debtors and sales made on credit • It show how quickly clients are paying their invoices
  • 59. Number of Days Credit Taken • This Ratio measures the Effectiveness of the Organization’s Liabilities Payment • It sets out the relationship between creditors and purchases made on credit • It show how quickly the organization is paying its liabilities
  • 60. Stock Turnover This Ratio measures how quickly the organization turns over Stock into Sales This is another Efficiency measure It shows the Sales Efficiency in the Market Normally the definition of Stock includes Finished Goods Work in Process Raw Materials
  • 62. Overheads as Percentage of Turnover This Ratio measures how Efficiently the Organization is running its Operation. This is an additional Efficiency measure Normally the definition of Overheads refers to Operating Expenses and includes: • Rent • Utility Bills • Wages • Administrative Expenses
  • 63. Overheads as Percentage of Turnover
  • 65. What Investment Ratios mean? Investment Ratios measure investor response to owing and organization’s Stock Investment Ratios measure the Cost of issuing Stock They are concerned with the Return On Investment “ROI” They are concerned with the relationship between the Return and the Value of the investment in the Organization
  • 66. Does the organization have Investment Potential? These are the most useful Ratios The Accounting Ratios that Focus on Investment Potential include: Price / Earnings Ratio “PER” Price-to-Book Ratio “PBR” PE to Growth Ratio “PEG” Dividend Yield “DY”
  • 67. Price / Earnings Ratio This Ratio is one of the most helpful It is usually used to compare the Organization with: • Peers • Industry Sector • Overall Market
  • 68. Price-to-Book Ratio This Ratio represents the value of an Organization if it is Broken up and Sold It usually includes anything that can be sold such as: • Equipment • Buildings and Lands • Stock Holding and Bonds
  • 69. Price/Earning to Growth Ratio This Ratio illustrates the relationship between stock price, Earning Per Share “EPS”, and organization’s expected growth rate Used in Management discussions for Strategic growth considerations It is widely used indicator of a Stock’s potential value
  • 70. Dividend Yield This DY is used to calculate the earning on investment It is expressed in Percentage It is considered equivalent to the Interest Rate on the Money Invested
  • 72. Healthcare managers at all levels must understand the fundamentals of finance and how that knowledge is used to enhance the financial well- being of the institution
  • 73. What Does the Healthcare Manager Need to Know to understand financial management? 1) The original records 2) The information system 3) The accounting system 4) The reporting system.
  • 74. DEFINING HEALTHCARE FINANCE Healthcare finance can have many different definitions, depending on the setting. healthcare finance encompasses the accounting and financial management functions of healthcare organizations. Accounting involves the measurement, in financial terms, of a business’s operations and financial status, while financial management (corporate finance) involves the application of theory and concepts developed to help managers make better decisions. In practice, the two functions blend, with accounting generating the data needed to make sound decisions and financial management providing the framework for those decisions.
  • 75. THE ROLE OF FINANCE IN HEALTH SERVICES ORGANIZATIONS The primary role of finance in health services organizations is to plan for, acquire, and use resources to maximize the efficiency of the organization. This role is implemented through specific activities such as planning and budgeting.
  • 77. The Four C’s activities can be summarized by the four C’s Costs. • Costs must be continuously monitored to ensure that they are not excessive for the number of services provided. Cash. • Businesses must have sufficient cash on hand to meet payment obligations as they occur. Capital. • Businesses must raise the capital (money) necessary to buy the facilities and equipment needed to provide services. Control. • Businesses must control their resources to ensure that they are used wisely.
  • 78. Importance of Finance over Time When most health services organizations were reimbursed based on costs incurred, the role of finance was secondary. Today, however, the finance function has increased in importance. Note that there are no unimportant functions in health services organizations. • Operations, human resources, facilities, and so on are all essential to mission accomplishment
  • 79. Finance Department Structure Chief Financial Officer (CFO) Treasure Capital Employment Debt Management Financial Risk Management Capital Acquisition Comptroller Budgeting Reporting Payables Financial Operations
  • 80. Financial Management Elements •The financial manager identifies the steps that must be taken to accomplish the organization’s objectives. Thus, the purpose is to identify objectives and then to identify the steps for accomplishing these objectives. Planning. •The financial manager makes sure that each area of the organization is following the plans that have been established. Controlling. •The financial manager decides how to use the resources of the organization to most effectively carry out the plans that have been established. Organizing. •The financial manager makes choices among available alternatives. Decision making.
  • 81. Health Services Settings Health services are provided by numerous types of organizations in many different settings. include the following settings Hospital (inpatient) care Ambulatory (outpatient) care Long-term care Integrated delivery systems Home Healthcare
  • 82. Current Challenges Surveys of healthcare managers reveal the following concerns: Financial challenges • Level of reimbursement • Bad debt losses • Billing and collections process (revenue cycle) • Capital acquisition (raising money) Balancing clinical and financial issues
  • 83. How does finance work in the Healthcare Business? And because the business of healthcare is service, the explanation, and illustration within this report focus on the practice of financial management in the service industry. The healthcare industry is a service industry, its essential business is the delivery of healthcare services. The real key to understanding finance is understanding the various pieces and the relationship to each other.
  • 84. The managers within a healthcare organization will generally have one of three views: • managers generally work with finance on a daily basis. • The reporting function is part of their responsibility. • They usually perform much of the strategic planning for the organization. The Financial view. • These managers generally work with the system of the organization. The Process views. • These managers generally are responsible for service delivery and have direct interaction with the patients and are responsible for clinical outcomes of the organization. The Clinical view.
  • 86. Financial Terminologies • Subtracting current liabilities from current assets gives you the Organization’s net working capital, or the amount of money tied up in current operations Working Capital • It is a component of working capital that directly affects many non-financial managers Inventory
  • 87. Financial Terminologies • The use of borrowed money to acquire an asset is called financial leverage. People say that a company is highly leveraged when the percentage of debt on its balance sheet is high relative to the capital invested by the owners Financial leverage • Revenues – Expenses = Net Income Net Income
  • 88. Financial Terminologies • They include the salaries of employees, office rents, sales and marketing costs, and other costs not directly related to making a product or delivering a service Operating Expenses • appears on the income statement as an expense, even though it involves no out-of-pocket payment. It’s a way of allocating the cost of an asset over the asset’s estimated useful life Depreciation
  • 89. Financial Terminologies • The discount rate at which the net present value of an investment equals zero EBIT • Earnings before interest and taxes divided by interest expense. Creditors use this ratio to gauge a company’s ability to make future interest payments in the face of fluctuating operating results Interest Coverage Ratio
  • 90. Financial Terminologies Internal Rate of Return (IRR) • They include the salaries of employees, office rents, sales and marketing costs, and other costs not directly related to making a product or delivering a service Operating Budget • A projected target for performance in revenues, expenses, and operating income
  • 91. Financial Terminologies • The monetary value today of a future payment discounted at some annual compound interest rate Present Value (PV) • The present value of one or more future cash flows less any initial investment costs Net Present Value (NPV)
  • 92. Financial Terminologies • Annual net profits left after payment of dividends that accumulate on a company’s balance sheet Retained Earnings • The difference between actual and expected results in the budget. A variance can be favorable, when the actual results are better than expected, or unfavorable, when the actual results are worse than expected Variance