ExpandingCredit Lines inOrder to ExpandAssessing a Co.docx

Expanding
Credit Lines in
Order to Expand:
Assessing a Company's Viability for Expansion Financing
While at oiie poiiit it seemed like compa-
nies would never emerge from what has
been termed the Great Recession, they are
now not only emerging, but actually
growing and expanding. However,
one big issue from both the
borrower and the lender side
has been challenges related
to expansion financing.
By Steve Agran
For recovering companies, additional
financing for working capital increas-
es would be necessary, but increasing-
ly difficult to come by at reasonable
interest rates. During the recession,
bank loan commitments were re-
duced, while mounting losses were
financed by utilizing availability under
the working capital line of credit. As
the economy recovered, liquidity was
much tighter while availability was
lower. Companies did benefit from

the fact that the recovery was slow
and, therefore, rapid working capital
requirements often associated with
growth did not materialize. Ultimately,
the recovery has led to companies
needing expansion capital but finding
it hard to come by.
Many companies facing this exact
situation have turned to MorrisAnder-
son to discuss ways to improve liquid-
ity and availability for credit. The
squeeze on expansion financing was
particularly difficult for companies
that had recently experienced poor
results and earnings, but had turned
the corner and were trying to expand.
The issue for lenders, of course, is
that, in order to accurately approve
a company for expansion financing,
they needed to gain a holistic look at
the company's past performance and
projections for future growth to un-
derstand both the benefits and risks
involved in expanding credit lines.
Starting in 2008 or 2009, financial in-
stitutions began consolidating and be-
ing much more stringent and selective
in the expansion financing process
- doing so because the demand for
capital was plentiful, regulation was
heightened, while the credit risk was
increased. As a result, many lenders
needed to determine - particularly

with accuracy -whether a potential
borrower was economically stable
enough to have its lines of credit
increased.
Lenders have frequently turned
to turnaround restructuring firms to
help with distressed clients (from The
Secured Lender's October 2009 issue,
"Restructuring and workout consul-
THE SECURED LENDER OCTOBER 2013 29
tants are still finding their hands full
as lenders pull them in to help w i t h
troubled clients") but also for inde-
pendent assessments on the ins and
outs of a company's expansion plans
and provide guidance on financing
options.
Considerations for Expansion
Financing: A Checklist
It's essential to regularly assess a
company's issues, opportunities and
overall viability. When assessing

expansion financing and lending op-
tions, consider the following checklist:
> What are the company's specific
expansion plans and projected
timeline?
I What are the financial projections?
> What is the projected cash flow?
I What are the capital expenditures
and projected timing on return on
investment?
> When does the company expect to
realize profitability?
> Does the company have a solid base
from which to expand?
I Will the company be able to main-
tain a high level of quality prod-
ucts/services?
t What resources are being dedicated
to product and process improve-
ment?
> Will management be able to main-
tain control during the period of
growth?
> Will management be able to main-
tain focus on employees as well as
client needs?

Below is a recent case study to illus-
trate the above checklist in action.
Case Study: Medical Device
Contract Manufacturer
The Challenge
The client, a medical device contract
manufacturer, had historic annual rev-
enues of S30 million with a $5 million
EBITDA. In 2011, the company agreed
to build a manufacturing facility in
Asia and transfer some IP to its larg-
est customer, representing 40% of its
revenue. The company and its equity
sponsors were comfortable with the
negotiated purchase price, the trans-
fer of production and construction of
the new facility was expected to take
12 months and they planned on replac-
ing the lost revenue by the time the
transfer took place. Unfortunately, the
construction of the new plant in Asia,
for unrelated reasons, took 18 months
to complete and new business took
longer than projected, leaving the
company with an SG&A structure they
might have, otherwise, reduced sooner.
Additionally, two new customer
product launches had start-up issues,
resulting in losses (adding to the bur-
den of SG&A from the Asian contract)

and expansion plans in its Caribbean
operation were costly, resulting in
2012 EBITDA being reduced to Si.2 mil-
lion. On a positive note, the company
was approached by a multi-billion
dollar medical device company to
transfer the production of one of its
products that, once implemented,
would result in $20 million of annual
revenue at a 22% gross margin.
When the company approached
its bank regarding the new business
and the need for additional expansion
financing, the loan was transferred to
the bank's restructuring group. The
company was highly leveraged, based
on the 2012 EBITDA, and the loan
officer asked the company to hire a
turnaround firm to review the project
and recommend a financing solution.
The
Solution
During the one-month assessment pe-
riod, it was evident that the company
was well positioned for rapid growth.

Company management dedicated sig-
nificant resources to product develop-
ment and product improvement, while
still maintaining high quality. The
company's focus on client needs and
service, while maintaining open book
accounting, was very attractive to its
existing and potential clients.
The company had always manufac-
tured some products in the Caribbean
and had built a base of employees and
management from which to expand.
The favorable labor rates and relative
proximity to their headquarters in
the US provided the company with a
cost advantage, while allowing them
to monitor and maintain high quality
control. The issue, though, is maintain-
ing the high quality and profitability
during these rapid growth periods and
management was concerned if they
had the proper controls in place. The
turnaround firm identified the weak-

nesses in their corporate structure,
management ranks and reporting, and
the company was quick to embrace the
recommendations for improvement.
By this time, the reasons for the
new product launch losses had been
identified, corrected and eliminated.
More importantly, the new $20 million
product was being fast-tracked and
the company needed financing in
place for the june 2013 new product
launch.
The Result
The turnaround firm worked with
management to develop integrated
financial projections for 2013 and
2014. While earnings were improving,
real profitability would not be real-
ized until Q3 2013. The construction
of another new Caribbean facility
and the anticipated working capital
squeeze required an additional S6
million. The turnaround firm identified

numerous financing options for the
company and the bank to consider.
It quickly became evident that the
bank's restructuring group was not in
the position to provide the additional
$4 million of construction financing
that was required plus $2 million for
working capital.
The issues were twofold:
I The company's weak earnings dur-
ing 2012 were not enough to cover
the term debt outstanding and the
fact that the new facility would
be located in the Caribbean made
it difficult for the bank to lien the
property.
> The bank also expressed interest in
providing the additional working
30 THERE IS STILL TIME TO REGISTER FOR CFA'S
ANNUAL CONVENTION, WWW.CFA.COM

capital funding, but would need the
results through June 2013 before
finalizing a commitment.
In order to finance the construc-
tion costs, the company reached out
to its private equity partners for new
capital. The equity partners expressed
concern regarding the bank's position,
but a forbearance agreement brokered
by the turnaround firm provided the
comfort they needed. The company
was also able to push back some of the
timing of its construction payments to
ease the cash burn as sales and profit-
ability improved during Qi 2013. The
company was also able to purchase
some inventory with extended pay-
ment terms that would also improve
liquidity. Finally, the company began
to explore alternative lending options
that would provide it with the working
capital necessary during the start-up

phase of its new project. The turn-
around firm projections demonstrated
that the working capital squeeze
would reverse by January 2014 but
short term liquidity would be an issue.
The financing was viewed as a bridge
to January 2014, when new financ-
ing would be established, resulting
from the improved operating results.
Having the projections in hand, all
parties were able to easily assess the
risks and the timing of completing the
turnaround.
interest rates) to support the growth.
The difficulties that most companies
experienced between 2008 and 2011
have made historical financial perfor-
mance an albatross around their necks
as they emerge while trying to expand.
As a result, companies are in need of
strategic reviews to ensure they will
be prepared for the liquidity required
to succeed as they expand. At the
same time, lenders require indepen-

dent assessments of past performance
and projections for future growth, as
well as an in-depth analysis and under-
standing of the risk associated with
the expansion of credit lines beyond
current levels, TSL
Steve Agran is a managing director at
MorrisAnderson. Steve has spent more
than a decade providing turnaround and
interim management services to middle-
market companies. He also has experience
handling liquidation and asset sales,
budgeting and cash flow for distressed
and failing companies and bankruptcies.
Steve is an ABI member, a Certified

Public Accountant (CPA) and a Certified
Insolvency and Restructuring Advisor
(CIRA). He can be reached at sagran®
morrisanderson.com
Conclusion
As was done with our Medical Device
Contract Manufacturing client, the
turnaround firm was able to provide
an independent assessment that
helped the bank and other inter-
ested parties better understand the
company and its expansion financing
requirements, while helping the com-
pany review its processes and better
understand its borrowing needs.
Without a doubt, the current
environment in commercial lend-
ing still makes it difficult for growth
companies that are re-emerging from

the recession to obtain increases to
their lines of credit (at reasonable
THE SECURED LENDER OCTOBER 2013 31
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Finance Association and its
content may not be copied or emailed to multiple sites or posted
to a listserv without the
copyright holder's express written permission. However, users
may print, download, or email
articles for individual use.
The New Break-Even Analysis
J AM ES LASKARIS, KATIE REGAN
I T ’ S T I M E T O EXPA ND T HE SC OPE A ND A SSUM
PT I ONS OF T HE T RA DI T I ONA L BREA K- EV EN A
NA L YSI S.

At a Glance
Changes in the economic and legislative environment have
complicated the capital acquisition landscape.
Hospitals and health systems should:
Question the assumptions that underlie their break-even analysis
Revamp the break-even calculator
Engage in discussions about the clinical aspects of equipment
and technology acquisition decisions
Hospitals and health systems that contemplate an investment in
new equipment or technology typically estimate
procedure volume, payment rates, and the useful life of the
equipment to determine how long it will take to
recoup that investment. That information has allowed these
organizations to make reasonably accurate revenue
projections for purposes of conducting a break-even analysis
and making a capital acquisition decision. But
changes in the economic and legislative environment are

complicating the capital acquisition landscape. These
environmental changes are making it imperative for break-even
calculators to evolve based on new assumptions
and for providers to start having in-depth discussions about
nonfinancial factors as a routine part of their break-
even analysis.
Assessing the New Backdrop
Many trends that are reshaping the healthcare environment have
a direct effect on equipment and technology
decisions.
Outcomes-based payment. As payment is increasingly linked to
outcomes, providers are considering
investments in technologies with proven clinical benefits that
can help reduce length of stay, improve patient
safety, and reduce readmissions.
Population demographics. As a prerequisite to determining how
to reduce costs of care while managing

population health, providers are seeking to better understand the
demographics, health status, and projected
health utilization of the populations in their service areas.
The changing nature of competition. As hospitals consolidate
and health systems get bigger, these
organizations are becoming sensitive about competing with
other providers within their own networks
(geographical competition), especially when it comes to
acquisition of expensive, cutting-edge imaging or surgical
technologies.
The pricing package. Realizing that it is difficult to commit to
capital investments during times of change,
vendors have become increasingly sophisticated at shifting
prices and revenue among capital, consumables, and
service, seeking to maintain perceived equipment affordability
up-front while locking in downstream revenues

and margins. Therefore, providers should move beyond capital
considerations and include discussion of service
contracts and the cost of consumables over the lifetime of the
equipment in their negotiations with vendors.
Against that backdrop, the new break-even analysis may
consider four main factors:
Cost
Utilization
Payment and margins
Clinical considerations
Cost
Although capital outlay typically represents a large percentage
of up-front costs associated with a new
technology, other expenditures also should be considered when

projecting true costs or comparing technologies.
These include the cost of capital, labor, consumables, service,
and length of stay (LOS).
Capital. With the exception of unique technologies, today’s
healthcare supply-side marketplace is very
competitive. Multiple configurations, installation, and
discounting have resulted in significant variations in pricing,
making pricing less transparent. Health systems have begun to
pool their purchasing power to achieve price
concessions from vendors. Even though capital cost increases
have tracked closely with the consumer price
index, expenses are shifting to consumables and service.
Vendors are beginning to make technologies more
dependent on consumables, thereby increasing the overall cost
of a technology. It is therefore important to
consider consumables and service when developing a business
plan for a new technology.

Labor. Labor can be one of the most significant cost factors in a
break-even analysis. Labor is a key cost factor
for any clinical technology or IT investment. Overall, labor—
including benefit costs—makes up approximately
50 percent of a hospital’s expenses. This portion includes
overhead labor, such as administrative and medical
records staff, which can add 10 to 20 percent to the cost of a
test or procedure, as well as clinical labor.
Although vendors are developing less labor-intensive
technologies designed to promote efficiency, these
technologies do not always translate to reduced labor costs.
Consumables. Consumables represent the next largest line item
for hospitals. Sixty percent of a hospital’s
consumables fall into the areas of cardiology, pharmacy, and
surgery, which thus have a large impact on cost per
patient or procedure. Along with physician preference items and
supplies, many consumables that are dedicated
to a capital purchase should be taken into consideration. For
example, imaging dyes can range from $40 to $80

per patient, which translates to a cost of $100,000 to $200,000
per year for a hospital that does, on average,
2,500 imaging studies per year.
Some consumables have a low unit cost, but their high volume
results in significant expenditures. For example,
infusion pump tubing may cost only $8 per patient, but a
facility with 100 pumps would spend more than
$160,000 per year on tubing alone, assuming an average of 200
patients using each pump annually. Consumable
costs can vary dramatically between vendors and technologies.
Many vendors tie their capital technologies to
specific consumable revenue streams. Be aware that some
vendors use the “razor/razorblade” model, in which
the capital outlay for a piece of equipment is relatively low, but
the buyer is then locked into buying a steady
stream of disposables from that vendor. The consumable costs
of basic standard-of-care technologies, such as
IV therapy and pulse oximetry, are far higher over their lifetime
than the original capital outlay. In the clinical
laboratory arena, consumables represent a $7.8 billion market

per year, dwarfing the capital side. Advanced
systems, such as robotics or lasers, add a premium to their
consumables in the form of a per-patient royalty.
These costs should be determined up front.
Service. Service can have a significant impact on overall
equipment and technology costs over the equipment’s
life cycle. Each year, the healthcare industry spends more than
$14 billion providing service on medical
technology, accounting for 3 to 7 percent of original technology
costs per year. For low-utilization technologies,
that can determine whether a break-even point is reached over
the lifetime of a purchase.
To put this in perspective, the service cost for a $200,000
ultrasound machine is more than $10,000 per year.
Based on a five-year life, this amounts to a $40,000 line item or
20 percent of the equipment costs. For other
systems such as a CT scanner, MRI scanner, or instrument
washer, service can account for 40 percent of total

cost.
Given the high-tech, software-driven nature of current medical
technology, service costs have been increasing.
Multiple service options are available; the key for the hospital
is to balance the dual objectives of reducing costs
and safeguarding outcomes. The manufacturer’s full-service
contract represents the high end of service costs. It
is generally best to figure half or two-thirds of the
manufacturer’s service contract cost when creating a budget.
In lieu of service contracts, hospitals may use their in-house
clinical engineering staff to service equipment or may
elect to pay for service on a time-and-materials basis.
LOS. Technology developers are concentrating on less invasive
technology that has the potential to reduce
operating room (OR) time, recovery time, and LOS. The
challenge is determining the extent to which a new
technology actually does reduce LOS and OR time. Peer-
reviewed journals are an excellent resource for

determining how a technology can affect LOS and OR time.
Factoring in LOS or OR times can be tricky as pricing standards
in the industry can vary. In general, for inpatient
procedures, the patient’s projected LOS should be based on the
geometric LOS for each DRG provided by the
Centers for Medicare & Medicaid Services (CMS). A good
guide for internal cost is $500 per day for nursing
units and $1,200 to $3,000 for critical care, with the high end of
the critical care range representing patients
receiving ventilator support. For outpatient procedures, $600
represents a good high mark for a 23-hour stay,
and for less than 23 hours, fractions of that amount can be used.
The standard value for the cost of OR time is
approximately $30 to $50 per minute, taking into account the
cost of room, light, tables, and support services,
although for cardiovascular procedures, per-minute cost can be
$60 or more. For outpatient centers, it is usually
slightly lower.
Utilization

Utilization has a direct effect on break-even points and profit
margins. Traditionally, utilization projections have
come from physician input and historical data, but projecting a
break-even point offers a more effective way to
determine utilization. It reverse-engineers utilization by taking
cost and revenue numbers and calculating how
many procedures must be performed for a new technology to
yield a profit. This can help a provider determine
the financial viability of a particular technology based on its
own numbers. It should not, however, be used to set
a target volume the hospital needs to meet in order to make a
technology affordable.
Under the Taxpayer Relief Act of 1997, CMS has tied payment
rates for high-end imaging (e.g., CT, MRI,
positron emission tomography) to utilization. In 2010, the
utilization rate requirement was increased from 50
percent to 60 percent. To receive full payment in 2013,
hospitals will have to use their systems 90 percent of the
time. To put this into perspective, a facility that would have
needed 4,000 patients per year under the 50 percent
rate to achieve break-even status would need 7,000 patients per

year under the 90 percent rule.
Technology life expectancy. Equipment lifespan is an important
data point for determining the viability of a
technology. Most facilities use the American Hospital
Association’s Guide to the Estimated Useful Lives of
Depreciable Hospital Assets as a benchmark. This guide, which
was published in 2008, projects the life of an
asset until a major upgrade is required. However, there are
discrepancies between the published numbers and
real-world experience. For example, the guide rates the life
expectancy of robotic equipment at seven years, but
we have yet to see a system in place more than five years
without a major upgrade. In our survey research, most
CFOs target a payback period of one to two years, well below
the projected life of the equipment.
Payment and Profit Margins
The Affordable Care Act includes two key provisions—“never

events” and payment reductions for readmissions
—that now tie payment to outcomes and allow CMS to impose
steep financial penalties on providers. Such
outcome-based payments can make projecting revenue from a
technology more complicated as they are really
cost-avoidance considerations and not as straightforward as
other components in the break-even calculator.
Average CMS payment provides a good guide when determining
the effect of payment on a purchasing decision.
Although Medicare payment historically reflected a worst-case
scenario, private payers no longer reimburse at
significantly higher levels than Medicare; in some geographic
locations, private payer reimbursement may even be
lower than Medicare rates.
Clinical Considerations
As CMS transitions from volume-based to outcomes-based
payment, hospitals are seeking ways to deliver
better care while holding the line on costs. Value analysis teams

working across department lines now consider
the impact of any new technology decision on LOS, infection
control, and hospital readmissions.
In addition, providers should address population and
geographical concerns, which dictate payment and volumes
for specific procedures. Competition is an important factor; not
every urban center can support multiple
specialized physician practices or specialized technology such
as robotic surgery systems, proton beam therapy,
and hybrid ORs.
Population demographics. Although population demographics
often are left out of discussions about new
technology acquisitions, demographics are highly relevant to
technology decisions. In areas that serve a large
percentage of non-Medicare patients, labor and delivery is
likely to account for the top six of the 10 most
common DRGs. In comparison, providers that serve a high
percentage of Medicare patients find that pneumonia,

chronic obstructive pulmonary disease, heart failure, and joint
replacement are among the most common DRGs.
Geographic competition. In addition to competing with other
providers for patients and for physician services,
hospitals and health systems need also be sensitive about
competing within their own networks. Major capital
purchases at the corporate level that impact an entire service
line should now take into consideration not only a
hospital’s traditional geographic service area but also how the
purchase will affect the network or hospital
system.
A break-even calculator that takes into account financial and
clinical considerations is a valuable tool that can
allow a hospital to strategically invest in technology that can
combine improved outcomes, efficiency, and margins
in a way that is right for a particular hospital or health system,
as the examples in the following sections show.

The Example of Robotics
According to a robotic surgery equipment manufacturing report,
industry revenue derived from robotic
treatments is projected to increase at an average annual rate of
14.9 percent to $4.2 billion from 2011 to 2016
(IBISWorld, Robotic Surgery Equipment Manufacturing in the
U.S.: Market Research Report, October
2011). Both soft tissue and orthopedic robotic treatments
therefore should be key areas of interest for hospital
administrators.
Utilization of robotic surgery for knee and hip replacements is
of particular relevance, given that 719,000 total
knee replacements and 332,000 total hip replacements were
performed in the United States in 2010, according
to the Centers for Disease Control and Prevention/National
Center for Health Statistics 2010 National Hospital
Discharge Survey.

Treatment options, including robotic surgery, image-guided
surgery (IGS), and manual techniques, vary in terms
of durability. Studies have found that alignment errors greater
than 3 percent in artificial knee procedures are
associated with implant failures. Conventional manual
techniques had a nearly 32 percent chance of a greater-
than- 3 percent misalignment, while this number decreased to 9
percent in cases when an IGS was used. In
contrast, surgical orthopedic robots were able to achieve
consistent alignment. This translates into a more
durable procedure.
As a guide, using IGS technology and standard implant pricing,
a hospital that performs 240 procedures per year
over a five-year period could net more than $2 million in
profits, as shown in the exhibit on page 92. In contrast,
a provider with the same procedure volume using robotic
technology would lose $285,000 over that period. To

break even using robotics, a hospital would have to perform 300
procedures per year.
At first glance, it would appear that orthopedic robotic
technology is not the best approach, from a financial
standpoint. However, unlike IGS, robotic surgery is an
appropriate treatment option for younger patients, which
should translate into higher utilization rates.
Such considerations should open up an important discussion
about the effects of patient demographics and
geographical considerations when selecting technology. In an
area with a high Medicare patient population, IGS
might be ideal. In an area with more young patients, robotic
surgery would be a more viable option—in part due
to the high accuracy of robotic surgeries, which extends the life
of the implant.
Robotic technology also can perform custom partial knee
resurfacing, giving younger patients an option other

than joint replacement for surgical treatment of arthritis. It
should be noted that robotic surgery is still in the early
stages of application and might not be suitable for every
hospital in a network.
Exhibit 1
The Example of Prostate Surgery
For years, transurethral resection of the prostate (TURP) was
the standard of care for benign prostatic
hyperplasia (BPH), a common condition in older men. The early
1990s saw the introduction of the Nd YAG
laser as a treatment option for BPH and by the mid-2000s,
photoselective vaporization of the prostate (PVP)
through the KTP laser became available on the market.
Compared with TURP, PVP represented a considerable
investment in capital and consumables. Studies also have found
that although PVP has a slightly longer procedure
time, both YAG and TURP require a longer LOS and
catheterization time.

When PVP first hit the market, CMS reimbursed the technology
at a rate more than twice that of TURP because
PVP resulted in fewer complications, such as bleeding during
surgery, erectile dysfunction, and urinary
incontinence after surgery, than TURP. Today, under
Ambulatory Payment Classification (APC) 429 (laser
surgery of the prostate), payment for PVP is $3,261. By
comparison, the total cost of TURP ranges from
$2,400 to $2,800 under APC 163 (prostatectomy with TURP),
which gives providers the potential to generate
margins of $230 per case based on 200 procedures per year for
five years. Based on these numbers, PVP
would generate far smaller margins ($100,000) over five years
than would TURP ($305,000) as a result of the
a
b
https://www.hfma.org/Content.aspx?id=20559#

lower cost of consumables associated with TURP. PVP would
also generate smaller margins than the YAG laser
($709,000), making the use of PVP questionable from a
financial standpoint, as shown in the exhibit below.
Exhibit 2
Although these numbers seem to make a case for TURP or
YAG, patient outcomes and patient satisfaction also
play a factor in payment and utilization of any technology. The
superior clinical outcomes associated with PVP
open up this procedure to a larger volume of patients.
Additionally, the lower incidence of complications for
minimally invasive laser procedures has driven informed
patients to push for use of these procedures. However, a
single facility may not be able to hit the PVP break-even point
of 120 patients per year. In this case, a business
plan based on multiple facilities feeding into one geographic
center of excellence might be the answer.

Expanding the Framework
As the contribution of equipment and technology to patient
outcomes is called into question, hospitals and health
systems will want to expand their break-even analysis to take
the full range of financial and nonfinancial factors
into consideration. It is incumbent on healthcare finance leaders
not only to expand their break-even calculators
to include the quantifiable factors, but also to engage in
discussions about the role of a new technology or
equipment in an increasingly value-based world.
James Laskaris, EE, BME, is a senior emerging technology
analyst, MD Buyline, Dallas.
Katie Regan is a clinical publishing analyst, MD Buyline,
Dallas.
footnotes
a. Moon, Y.W., Ha, C.W., Do, K.H., et al., “Comparison of
Robot-Assisted and Conventional Total Knee

Arthroplasty: A Controlled Cadaver Study Using
Multiparameter Quantitative Three-Dimensional CT
Assessment of Alignment,” Computer Aided Surgery, March
2012.
b. Al-Ansari, A., Younes, N., Sampige, V.P., et al., “GreenLight
HPS 120-W Laser Vaporization Versus
Transurethral Resection of the Prostate for Treatment of Benign
Prostatic Hyperplasia: A Randomized Clinical
Trial with Midterm Follow-Up,” European Urology. Sept. 2010,
pp. 349-355.
Publication Date: Monday, December 02, 2013
https://www.hfma.org/Content.aspx?id=20559#
mailto:[email protected]
mailto:[email protected]
http://www.ncbi.nlm.nih.gov/pubmed/?term=20605316
Copyright of hfm (Healthcare Financial Management) is the
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Management Association and its content may not be copied or
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posted to a listserv without the copyright holder's express
written permission. However, users
may print, download, or email articles for individual use.
Running Head: FINANCIAL ANALYSIS METHODS
1
FINANCIAL ANALYSIS METHODS
2
Financial Analysis Methods
Mekdes Asaminew
Instructor: Rebecca Robinson Bragg

Management of Healthcare Organizations
04/19/2019
Various Financial Analysis methods
Financial analysis is critical to evaluate the performance of an
enterprise. To establish the financial wellness of an
organization requires an evaluation of its financial information
either from the current period or comparing this period over a
number of financial periods. This information is always
obtained from the financial statement of the organization under
consideration. Three main financial analysis methods are
usually used to analyze the financial performance of an
organization.
1. Horizontal Analysis
This method compares financial information over several
reporting periods. In this case, each item of the income
statement is expressed as a proportion of the total sales
(Robinson, 2015).
2. Vertical analysis
The vertical analysis involves comparing two line items during
the same financial reporting period (Robinson, 2015).
3. Ratio Analysis
Ratio analysis is used to compare one number in relation to

another in the financial statement. The ratio is then compared
with a previous period to establish whether the organization
under investigation is in line with its set financial goals.
4. Trend analysis
This method compares financial statements for more than three
periods, with the earliest year being used as the base year.
How and why each of the Methods would be used in the
Organization's Financial Review
The horizontal analysis looks at how a dollar amount is the
financial statement of a company has changed over time noting
any differences from the expectations of the company over a
period of time (Robinson, 2015). On the other hand, the vertical
analysis looks at each line item as a percentage of the total cash
inflow of the financial statement in the company. Financial
ratios are used to identify whether the company is operating
within its set goals and highlight any potential issues that need
to be reviewed within the company. Trend analysis is similar to
horizontal analysis only that it compares financial information
for three or more financial periods.
Similarities and Differences among the Methods
Horizontal analysis and trend analysis are similar in that they
compare financial information on the same line item over two
different periods. The difference is that trend analysis uses data
from three or more periods while horizontal analysis only

compares two financial periods. The vertical analysis involves a
comparison of two lines items during the same financial period
while horizontal analysis compares each item on the financial
statement as a proportion of the total sales.
How one of the Methods would be used (Horizontal and vertical
analysis)
The table below shows both vertical and horizontal analysis
Period 1
Period 2
Vertical Analysis
Horizontal Analysis
sales
67,224
65,030

100%
3%
Gross Profit
45,566
44,670
68%
2%
Profit before tax provision on
Income
13,775
12,361
20%
11%
Net earnings
9,672

0%
-100%
The vertical analysis shows that gross profit is 68 percent of the
total sales for the period. Profit before tax provision on income
is 20 percent. Horizontal analysis
, on the other hand, indicates that sales for the current period
increased by 3 percent while gross profit by 2 percent. Profit
before the provision of tax on income increased by 11 percent.
Why this method should be used over other methods based on
the case financial challenges
Horizontal analysis should be used instead of other financial
analysis methods due to the fact that it is capable of enabling
the reviewer to assess the relative changes in different items of
the income statement over a period of time (Robinson, 2015). It
will also make it easier to analyze the behavior of revenues and
other essential items of the income statement over time which is
not possible while using other methods such as ratio analysis.
References
Robinson, T. R. (2015). International financial statement
analysis. John Wiley & Sons.

Assets
2012
2011
Cash and cash equivalents (Notes 1 and 2)
$14,911
24,542
Marketable securities (Notes 1 and 2)
6,178
7,719
Accounts receivable trade, less allowances for doubtful
accounts $466 (2011, $361)
11,309
10,581
Inventories (Notes 1 and 3)
7,495
6,285
Deferred taxes on income (Note 8)
3,139
2,556
Prepaid expenses and other receivables
3,084
2,633
Total current assets
46,116

54,316
Current Liabilities
Loans and notes payable (Note 7)
$4,676
6,658
Accounts payable
5,831
5,725
Accrued liabilities
7,299
4,608
Accrued rebates, returns and promotions
2,969
2,637
Accrued compensation and employee related obligations
2,423
2,329
Accrued taxes on income
1,064
854
Total current liabilities
24,262
22,811

Review on Net Cash Flows from Operating Activities.
The net cash flow from operating activities increased from the
year 2011 to the year 2012 by a margin of one thousand. This is
because there was an increase in the net earnings in the year
2012 and moreover the was also a significant increase in the
Depreciation and amortization of property and intangibles. This
implicates that the company sold more that’s why there was a
significant increase, which otherwise means there was a huge
stock turnover. My recommendations is that the company should
watch out on the increase of the current and noncurrent
liabilities so that it should not have a negative effect on the net
cash flow.
Review on Net Cash used by Investing Activities.
The net cash used by investing activities decreased from the
year 2011 to the year 2012 by a margin of $100. This was
because of a decrease in the purchase of investments and the
acquisition of net cash acquired. This resulted to the negative
deviation all through in the Net cash used in investing
activities. All this implicated that less investing was made in
the financial year 2012 than in the year 2011.I do recommend
that the company should watch over its purchase of investments
so that it can have a positive deviation always.
Review on Net Cash used by Financing Activities

The net cash generally used by financing activities increased
from the year 2011 to the year 2012 by a margin of $15000.
This was due to a significant increase in the purchase of
common stock and a reduction in the retirement in the short-
term debt. This occurrence caused a positive deviation which
resulted to the general increase in the financial activities
meaning it was a good year for financial activities. My
recommendations is that the company should work towards
reducing both short-term and long-term activities.
Review on Cash and Cash Equivalents at the end of the Years.
There was a decrease by a margin of $10000 from the year 2011
to the year 2012. This was because there was an increase in the
Cash and Cash Equivalents at the beginning of the Year and a
decrease in the cash and cash equivalents as the year proceeded.
My recommendation is that the company should watch over its
cash and cash equivalents.
Comparison of the two financial years.
The year 2012 stands to have a better financial year compared
to the year 2011as you consider the selected quarterly Financial
data results we see that the net earnings per share increase. For
example, there was a tax gain of $106 million in the year 2012
The second quarter of 2012 includes after-tax charges of $717
million for asset write-downs, $611 million from net litigation,
$564million associated with the acquisition of Scythes, Inc. and
$344 million from impairment of in-process research and

development.
Sheet1Current RatioItems20122011Total current
assets46,11654,316Total current liabilities24,26222,811Current
ratio1.90072
Sheet2John Jonssone Balance SheetAs at January 1,
2012AssetsLiabilities Current Assets Current liabilitiesCash
and cash equivalents(Notes 1 and 2)39453Loans and notes
payable (Note 7)11334Marketable securities(Notes 1 and
2)13897Accounts payable11556Account receivable
trade21890Accrued liabilities11907Inventories(Notes 1 and
3)13780Accrued rebates, returns and promotions5606Deferred
taxes on income(Note 8)5695Accrued compensation and
employee related obligations11081Prepaid expenses and other
receivables5717Accrued taxes on income7190Total current
assets100432Total current liabilities58674 Fixed
AssetsProperty, plant and equipment, net (Notes 1 and 4)30836
Long term liabilitiesIntangible assets, net (Notes 1 and
5)46890Long-term debt (Note 7)24458Goodwill (Notes 1 and
5)38562Deferred taxes on income (Note 8)4936Deferred taxes
on income (Note 8)11081Employee related obligations (Notes 9
and 10)17435Other assets7190Other liabilities19183Total
assets234991Total liabilities124686Assets20122011Cash and
cash equivalents (Notes 1 and 2)$14,91124,542Marketable
securities (Notes 1 and 2) 6,1787,719Accounts receivable trade,

less allowances for doubtful accounts $466 (2011, $361)
11,30910,581Inventories (Notes 1 and 3) 7,4956,285Deferred
taxes on income (Note 8) 3,1392,556Prepaid expenses and other
receivables 3,0842,633Total current assets 46,11654,316Current
LiabilitiesLoans and notes payable (Note 7)
$4,6766,658Accounts payable 5,8315,725Accrued liabilities
7,2994,608Accrued rebates, returns and promotions
2,9692,637Accrued compensation and employee related
obligations 2,4232,329Accrued taxes on income 1,064854Total
current liabilities 24,26222,811(Dollars in Millions Except Per
ShareFirstSecondThirdFourthFirstSecondThirdFourthData)Quart
er(1)Quarter(2)Quarter(3)Quarter(4)Quarter(1)Quarter(6)Quarte
r(7)Quarter(8)Segment sales to
customersConsumer3,5953,6193,5813,6523,6823,7933,7403,668
Pharmaceutical6,1336,2916,4026,5256,0596,2335,9826,094Med
Devices &
Diagnostics6,4116,5657,0697,3816,4326,5716,2836,493Total
sales16,13916,47517,05217,55816,17316,59716,00516,255Gros
s
profit11,22411,33211,45511,55511,39511,42510,93310,917Earn
ings before provision for taxes
onincome5,0452,0353,5953,1004,5103,4224,111318Net
earnings attributable to Johnson
&Johnson3,9101,4082,9682,5673,4762,7763,202218Basic net
earnings per share attributableto Johnson &

Johnson$1.430.511.080.931.2711.170.08Diluted net earnings
per shareattributable to Johnson &
Johnson$1.410.51.050.911.2511.150.08
Assets
AssetsCash and cash equivalents (Notes 1 and 2)Marketable
securities (Notes 1 and 2) Accounts receivable trade, less
allowances for doubtful accounts $466 (2011, $361) Inventories
(Notes 1 and 3) Deferred taxes on income (Note 8) Prepaid
expenses and other receivables Total current assets
20121491161781130974953139308446116AssetsCash and cash
equivalents (Notes 1 and 2)Marketable securities (Notes 1 and
2) Accounts receivable trade, less allowances for doubtful
accounts $466 (2011, $361) Inventories (Notes 1 and 3)
Deferred taxes on income (Note 8) Prepaid expenses and other
receivables Total current assets
20112454277191058162852556263354316
Amount
Current LiabilitiesLoans and notes payable (Note 7) Accounts
payable Accrued liabilities Accrued rebates, returns and
promotions Accrued compensation and employee related
obligations Accrued taxes on income Total current liabilities
46765831729929692423106424262Current LiabilitiesLoans and
notes payable (Note 7) Accounts payable Accrued liabilities
Accrued rebates, returns and promotions Accrued compensation
and employee related obligations Accrued taxes on income

Total current liabilities
6658572546082637232985422811(Dollars in Millions Except
Per ShareData)Segment sales to
customersConsumerPharmaceuticalMed Devices &
DiagnosticsTotal salesGross profitEarnings before provision for
taxes onincomeNet earnings attributable to Johnson
&JohnsonBasic net earnings per share attributableto Johnson &
JohnsonDiluted net earnings per shareattributable to Johnson &
Johnson(Dollars in Millions Except Per ShareData)Segment
sales to customersConsumerPharmaceuticalMed Devices &
Johnson(Dollars in Millions Except Per ShareData)Segment
sales to customersConsumerPharmaceuticalMed Devices &
JohnsonFirstQuarter(1)Segment sales to

Johnson3595613364111613911224504539101.431.41SecondQua
rter(2)Segment sales to customersConsumerPharmaceuticalMed
Devices & DiagnosticsTotal salesGross profitEarnings before
provision for taxes onincomeNet earnings attributable to
Johnson &JohnsonBasic net earnings per share attributableto
Johnson & JohnsonDiluted net earnings per shareattributable to
Johnson &
Johnson3619629165651647511332203514080.510.5ThirdQuarte
r(3)Segment sales to customersConsumerPharmaceuticalMed
Johnson &
Johnson3581640270691705211455359529681.081.05FourthQua
Johnson &
Johnson3652652573811755811555310025670.930.91FirstQuarte
r(1)Segment sales to customersConsumerPharmaceuticalMed

Johnson &
Johnson3682605964321617311395451034761.271.25SecondQua
Johnson &
Johnson3793623365711659711425342227761.011ThirdQuarter(
7)Segment sales to customersConsumerPharmaceuticalMed
Johnson &
Johnson3740598262831600510933411132021.171.14999999999
99999FourthQuarter(8)Segment sales to

Johnson36686094649316255109173182180.080.08
Sheet3
Running Head: CFO CASE STUDY
1
CFO CASE STUDY
5
CFO Case Study
Mekdes Asaminew
Rebecca Robinson Bragg
Management of Health Care

04/09/2019
Chosen Topic:
Role of a CFO in Hospital Financial Management
Financial Issues Outlined in the Case
There are many financial issues that have been outlined in the
case. One of the issues that have been described is that Trinity
Mother Frances Health System is lacking competent financial
management following the retirement of their long-serving
CFO. This has crippled financial management practice at the
hospital and resulted in their recruiting an interim CFO. Despite
their choice of an interim CFO, the hospital still requires a
permanent CFO to foresee all the financial management
practices of the hospital. In their pursuit of a permanent CFO,
they have engaged Warbird CFO consulting to help in the
process of appointing a competent CFO for the hospital.
Due to the lack of a permanent Chief Finance Officer, the
hospital wanted to deploy a competent financial officer to
execute financial management which was carried out by the
former CFO. However, the hospital seems to have lost financial
track and did not have sound financial planning practices. The
hospital worked together with Warbird consulting so that they
were able to recruit a permanent CFO who would end financial

management strain experienced by the hospital.
The roles of the CFO had been overlooked such as making
essential investments such as entry into the bond market which
restricted the financial outlay of the hospital (Seargeant, 2018).
The hospital lacked an audit department which resulted in
inappropriate cash management. The consulting company helped
the hospital establish an internal audit department that would
foresee inappropriate financial management practices and by so
doing improve the overall financial wellness of the hospital.
Moreover, the hospital lacked an investment portfolio that
would generate extra finances for the operations of the hospital,
and Warbird Consulting helped in the entering bond market at
lower risk and at the same time guarantee higher returns on the
investment.
The perspective of Financial Challenge
Financial management departments of a hospital are responsible
for all the financial obligations and planning. The department is
also responsible for maintaining g expenditure within the
budget to avoid the need for extra funds through borrowing
which can have serious repercussions to the operations of the
hospitals. It has an obligation to see that the money is available
to meet the hospital expenses and keeping contingency funds to
meet emergencies. If the financial management depart lacks the
appropriate management personnel, it can end up misusing

hospital funds which can affect the operations of the hospital
negatively. Trinity Mother Frances Hospital has to consult
before it employs a new CFO given the critical role they play in
enhancing activities of the hospital run smoothly (Seargeant,
2018). Employing inappropriately qualified CFO will result in
mismanagement of hospital funds which will affect the
operations of the hospital negatively.
Relevance to Financial Management
Proper financial management in hospitals is critical in
evaluating and planning the financial needs of the hospital. The
hospital has to make an appropriate investment decision so that
risk is minimized and enable the hospital to reap a maximum
return from their investment. Moreover, sound financial
management should ensure that the working capital is well
managed. This is done by finding the difference between the
current hospital assets and current liabilities to ensure the
hospital activities run effectively (Finkler, 2018). Besides, the
finance management team should make long term investment
decisions that involve proper strategy formulation to invest in
the underlying opportunity such as buying new hospital
equipment and the implication of such a decision.
References
Finkler, S. A. (2018). Financial management for public, health,
and not-for-profit organizations. CQ Press.

Seargeant, D. &. (2018). Four strategies to unlock performance
management constraints: Hospitals and health systems are
confronted with unprecedented challenges in managing
performance in the current business environment, yet all too
many organizations have limited understanding of. Healthcare
Financial Management, 72(4), 56-62.

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