Financial management for health managers, some key concepts.

1. Financial Management
for Health Managers
Dr. Amjad Idries

2. Outlines
1. Introduction to financial management (FM) for
health managers
2. Management accounting
3. Importance and principals for pricing decisions
in health care
4. Financial accounting
5. Financial control & information systems

3. Why it is important for you to know?
• To see the bigger picture !!!
• Not to be seated, as a manager, on faraway side
when financial issues were being discussed 
• Sometimes your advisory role, most likely on
organization’s board, require you to understand
these issues.

4. Key questions all will face
1. Would we be able to expand mother and child
health services by 10% with available funds?
2. At which level should user fees be set?
3. Can we afford to open a new trauma department
and hire the required staff?
4. What is the rate of return on the capital
investment of equipping and building a new
health centre?
5. Why has the health centre incurred a loss of
$500,000 and what measures should be taken to
improve financial performance in the next year?

5. New public management and health
sector reforms related to FM
1. Reorganizing the public sector into more
autonomous corporatized units.
2. Introduction of market elements with
contract-based competitive provision.
3. Cooperation with the private sector and
privatization.

6. New public management and health
sector reforms related to FM
4. Private-sector styles of management
practice.
5. Explicit use of measurable standards and
measures of performance.
6. Greater emphasis on outcomes.

7. Choose one offer for a bid on vaccination
• Offer 1: $ 3000 for 6000 vaccinations
• Offer 2: $ 4000 for 8800 vaccinations
• Offer 3: $ 6000 for 9000 vaccinations
Economic
selection
Effective
selection
Efficient
selection
Value of
money

8. What are the functions of any
Finance Department?
1. Financial accounting: provides summaries for
external users and regulatory bodies.
2. Management accounts: provide financial
information internally to managers to help in
managing the organizations.
3. Cash management: ensuring the organization
has enough money to meet its obligations.

9. What is the difference between:
Management accounting v.s financial accounting

10. What is the difference between:
Economic cost v.s. financial cost

11. Management Accounting
• It provides information for performance
monitoring.
• It combines information on inputs and process
(financial + activity).

12. Cost measured because:
(1) stocks and assets valuation;
(2) decision making;
(3) control; cost behaviour (variable, fixed, semi-
variable, stepped);
(4) to calculate the flexible budget you need
total cost at different activity levels;

13. Pricing Decisions in Health Care
• In private sector: affected by the market forces
(demand and supply) and competition,
discrimination is wide;
• In public sector: it depends on certain principles
and purchase policy as it involve 3rd party
payment,
• Internal pricing: inter the organization between
the departments to increase the cost
consciousness and efficiency used to justify the
price each unit charged internal (and external)
and for budgets requests.

14. Question mark Star
Dog Cash cow
Market
growth
Market share
Boston Group Matrix for Market Mix:

15. Market Mix
(1)Price: depend on quality, place and accessibility;
(2)Product: refer to product kind, the market will
response to quality, quantity and diversity. This
generally follow Boston Group matrix;

16. Market Mix
(3)Place: accessibility, competition, response to
consumers’ needs, equity of access,
contradicted with efficiency;
(4)Promotion: public awareness, confidence,
acceptance;

17. Question mark Star
Dog Cash cow
Market
growth
Market share
Boston Group Matrix:

18. Approaches to pricing policies and costing:
• Absorption costing: recover the full cost based on the average
cost, overhead cost is apportioned, problem is in contractions
activity must be the same as agreed,
• Marginal costing: recover on the variable cost, problematic if
the large part is fixed cost,
• Target pricing: adding mark-ups, common in private sector,
but in public the providers given incentives above that to keep
the cost less than planned,
• Penetrating pricing: recovering the marginal cost, lead to
maximizing the services demand, used in cost-leadership
strategy to maximize the growth, problem in recovering the
fixed cost,
• Price skimming: deliberately setting high process in monopoly
situation,

19. Introduction to financial accounting
Why accounting system:
(1) ensure all financial transactions were
conducted accurately,
(2) provide comprehensive records to compile
income and expenditures,
(3) used to produce accounts and reports,

20. Double entry system
• Basic concept, there are two basic sides of any
transaction (stock and cash OR debit and
credit);
• It reflect the source and uses of each
transaction, assets is something used in
running the work (organization’s uses),

21. Double entry system
• While liability is how assets were funded
(sources), capital is fund of owners,
assets = capital + liabilities (basic in double
entry system);
• To ensure accuracy; debit should be equal to
credit, this given in the trail balance,

22. Income statement:
• It give summary of income and expenditure
(transactions) over the report period,
Balance sheet:
• It shows assets, liabilities and capital,
snapshot,

23. The Income Statement
• It shows the income and expenditure or cost
relating to activities;
• Mainly consist of operating income, operating
expenses, overheads in addition to interest,
tax and dividends;
• To survive, the entity should have income
equal (or exceed) the expenditures;

24. Depreciation:
• Applied to fixed assets that bought but not for resale;
• It is the indication of fixed assets’ value diminution;
• In case of intangible assets it is called amortization;
• Useful economic life is the period over which the asset
will have some economic benefits;
• Residual value: is the value of the asset at the end of
economic life, and the net book value: is the original
cost of the asset minus the accumulated depreciation

25. The Balance Sheet
• It is a statement showing assets (fixed & current), liabilities
(current) and capital (resources) at a particular time;
• It helps in looking for past performance and help in setting
performance targets after adjustment;
• The concept of entity is applicable (clear in dealing with
the liabilities);
• It is different from income statement as this summarizing
the income and expenditure over a period of time – while
this is reflects the status at particular time

26. Cash Flow Statement
Cash flow is due to:
(1) initial capitalization,
(2) capital program,
(3) purchase (resale) of stocks and supplies,
(4) sale of goods or services

27. Working Capital Management
WC = current assets – current liabilities
working capital cycle

28. Importance of its Management:
(1) no cash creditors withhold;
(2) no cash no staff payment;
(3) no staff and no stocks there will be no
enough goods or services (less income),
(4) all of these lead to reduction of cash level
(continue),
It is important to ensure enough WC to pay creditors through
the monitoring of stocks, debtors, creditors, accruals and other

29. Interpreting Financial Statement
Financial position:
• Used to assess the health organization and its
ability to meet the short-term obligations, known
as solvency ratios,

30. Interpreting Financial Statement
Working capital ratio:
• Know as current ratio, compare the current
assets (cash and short-tem assets) with (/) the
current liabilities (payable in the near future),
• Recommended as 2:1 to survive but it depends
on the kind of activities and when it is 1:1 there
is concern about the ability,
• Compare it at different time period (different
BSs) for trend analysis whether declining or
increasing,

31. Liquidity Ration:
• known as acid-test ratio, also for short-term
purposes, similar to the above but it exclude
the stock from the current assets, it is more
critical than the above as it consider the effect
of the stock in hand on the cash flow,

32. Financial and Management Reporting
Types are:
(1) strategic: (planning, market analysis,
customer relations, evaluation);
(2) operational: (control, liquidity monitoring,
return monitoring), using variance analysis;
(3) financial audit reports