ABC of finance of hospital .A hospital adminstrator requires this knowledge .

1. 4/17/2015
http://www.healthbizindia.in/flip.php?type=26&date=2015­04­13%2000:00:00#page­17­18 1/1

2. 4/17/2015
http://www.healthbizindia.in/flip.php?type=26&date=2015­04­13%2000:00:00#page­18­19 1/1

3. Health Biz India May 20154
Front of the Book
Top News------------------------------------------------06
News that impacts the industry in ways more than one. Every
month, we fish out and bring to you the top news from among
the lot of numerous news that streams in
CurrentAffairs----------------------------------------08
Latest takeovers & mergers, new launches, new technologies,
and updates of the industry
Content May 2015 Vol 5 Issue 2
Center Stage----------------------------------------------------------------------------18
The Inspire Series: MiraCradle is an affordable passive cooling device, which uses the advanced
savE® phase change material (PCM) technology to induce therapeutic hypothermia among
newborns suffering from birth asphyxia. It has been developed by Pluss Polymers in collaboration
with CMC Vellore. And the best part? It costs just under Rs. 2 lakh, while others in the market are
no less than `10-15 lakh!
Editor-in-Chief
Jayata Sharma-Sand
Editorial Contributors
Vivek Shukla
Dr. AK Khandelwal
Vipul Jain
Dr. Anand Shroff
Subodh Tiwari
Avirat Shete
Marketing & Sales
Regional Sales Head
(New Delhi) Bhupesh Tewari
Consultant
(Mumbai) Deepti Khanna
Art & Design
Glowrt Design House
Cover Design
Pramod Jadhav
Online Production
Pramod Jadhav & Vishal
Phalke
Disclaimer: Health Biz India is an online maga-
zine only. We do not deal in any other service/
product under this name. Views and opinions
expressed in this magazine are not necessarily
those of Health Biz India, its Publisher and/or
Editors. We, at Health Biz India do our best to
verify the information published but do not take
any responsibility for the absolute accuracy of the
information.
Health Biz India does not take the responsibility
for any investment or decision taken by readers
based on the information provided in the maga-
zine. No part of this magazine can be reproduced
without prior written permission of the Publisher.
Health Biz India reserves the right to use the
information published in the magazine in any
manner whatsoever.
Printed by Vijay Dhingra and Published by Jayata
Sharma-Sand on behalf of Health Biz India.
Printed at 1752, Street No. 10, Rajgarh Colony,
Krishna Niger, New Delhi 110051; and Published
at C-1/701, Neelpadamkunj, Sector 1, Vaishali,
Ghaziabad 201010
HEALTH
BIZ INDIA
India’s 1st Online Healthcare Business Magazine
Content
May 2015_vol5 issue2 _HB.indb 4May 2015_vol5 issue2 _HB.indb 4 13-05-2015 22:49:5213-05-2015 22:49:52

4. 34
Strategy
Health Biz India May 2015
By: Dr. Ashok Khandelwal
I
n the last issue, we
started discussing how
it is a difficult task for
a hospital administrator to
look after its bottom line for
sustainability and survival in
a competitive market. Several
ratio calculations and the
ABC of finance was written
about. In this second and final
part of the series, we will try
and know more about budget
planning and making of
financial reports.
Budget planning
A budget is a formal written
statement of a hospital’s plan
for the future. The financial
budget is a management
control tool normally covering
a one year period. The
essentials of budgeting are to
set specific goals for future
operations and to have a
periodic comparison of actual
results with the financial goals
established.
There are three types of
budgets: operating budget,
cash flow budget, and capital
budget.
The objectives of a budget are:
• To provide written terms of
the hospital goals
• To provide a basis for
the evaluation of financial
performance according to the
plans
• To provide a tool to control
costs
• Statistical budget
The first step in preparing
an operating budget is to
prepare the statistical budget.
The objective is to provide a
measure of activity in each
department for the upcoming
budget period. Examples:
Number of radiological
investigations, number of
pathological investigations,
number of indoor patients,
outdoor patients, number of
operations, etc.
Planning & Reporting
Budget planning and financial reports should form a major
part of a hospital administrator’s profile
May 2015_vol5 issue2 _HB.indb 34May 2015_vol5 issue2 _HB.indb 34 13-05-2015 22:50:1813-05-2015 22:50:18

5. 36
Strategy
Health Biz India May 2015
Knowledge of the past
performance of a facility
is useful in the forecasting.
The last five years is an
appropriate amount of
history to keep on file. This
enables management to plan
for future operations.
• Operating budget
The operating budget is
composed of the expense
budget and revenue
budget. It mentions, for
the upcoming fiscal year,
anticipated income by
source, and anticipated
xpenses. Administration
should always pursue a larger
revenue budget than expense
budget, therefore projecting a
profit on the bottom line. The
profit is used to finance the
capital budget.
• Capital budget
‘The capital budget
summarises future plans for
acquisitions of plant facilities
and equipment. It is essential
for the growth and survival
of a hospital in present era
of competition. Cost benefit
analysis should be used
appropriately. It should be
around 2%.
• Cash budget
Without cash, a hospital
cannot survive. This is the
primary reason for a cash
budget. In the present era of
around 30-50% of services
provided on credit basis for
TPAs, medical insurance,
and corporates, the problem
of delayed payment in this
reccessible amount and
predicting cash flow requires
a lot of thought and planning.
Cash flow should be reviewed
on a monthly basis to enable
administration to foresee cash
shortages and seek possible
financing if necessary.
Financial reports
The hospital’s financial staff is
responsible for providing the
hospital administrator with
accurate financial statements
on a timely basis. Why is it
important to understand your
financial reports? Because
financial statements are the
language of business. Not
understanding them leaves
you vulnerable to a number
of potentially unpleasant
situations. Advantages of
knowing your financial
reports: Information is
provided about whether your
hospital is profitable or not;
you come to know if your
hospital operations provide
enough cash flow to: pay
your debts, pay your current
Statistical
Budget
Expense
Budget
Revenue
Budget
Operating
Budget
Capital
Budget
Expected Operating Expenditure
Finance
9%
Administrative
6%
Man Power cost
40%
Operational
45%
• Analysis of Financial Ratios
A
B
C
• Budget Planning
• Comprehending Key Financial Reports
May 2015_vol5 issue2 _HB.indb 36May 2015_vol5 issue2 _HB.indb 36 13-05-2015 22:50:2113-05-2015 22:50:21

6. www.healthbizindia.in
37
Strategy
Health Biz India May 2015
obligations (like payroll and
rent); it is the way to know
if your hospital business has
grown. Simply being on high
occupancy or more utlisation
of services is not a reliable
indicator of true practice
growth or financial health.
Balance sheet
The balance sheet reports the
hospital’s assets, liabilities
and fund balance. Assets can
be current, property, plant,
equipment, designated and
other. Current assets have
an expected life of one year
or less. These include cash,
accounts receivable and
inventories. It is expected that
inventory supplies will be used
within one year of purchase.
Property, plant and equipment
assets have a life of more than
one year.
Designated assets may be
board-designated accounts
such as fund depreciation,
self-insurance reserves or
other reserve accounts, or
trustee-designated accounts,
which include interest and
sinking funds as required by
bond trustees. Other assets
include donated property,
bond issuance costs and
deferred charges.
Liabilities are the monies
a hospital owes to other
parties, or benefits that the
hospital has accrued but not
yet earned. Liabilities are
recorded in two categories
– current liabilities and
long-term liabilities. Current
liabilities are those that are
expected to be paid by the
hospital within one year. For
example, under ‘Accounts
Payable’, paying vendors for
hospital supplies. Long-term
liabilities require extended
payments, the hospital’s
long-term debt is a long-term
liability.
The fund balance or
retained earnings is the
difference between total
assets and total liabilities and
represents the equity of the
hospital. It is an accumulation
of all the prior year’s earnings
and contributed capital such
as stock or donations.
Profit and loss statement
(P&L)
It is also known as income
statement. Revenue in the
income statement represents
patient revenues or charges
to the patient for hospital
services provided. Revenue
is the accumulation of total
patient billings. Gross revenue
is the total charge that the
hospital has billed for services
provided to the patient. Net
revenue is the amount that
is expected to be paid by the
patient and a third-party
payer, such as Mediclaim,
ECHS, CGHS etc.
• Covering a one-year period
Operating
Budget
Cash Flow
Budget
Capital
Budget
• Supplementing the operating budget
• Generally covering a three-year pan
May 2015_vol5 issue2 _HB.indb 37May 2015_vol5 issue2 _HB.indb 37 13-05-2015 22:50:2113-05-2015 22:50:21

7. 38
Strategy
Health Biz India May 2015
Contractual allowances, bad
debt, discounts and charity
care account for the difference
between gross revenue and
net revenue. These allowances
are one of the features that
make hospital accounting
different from most other
industries’ accounting
practices. The ‘contractual
allowance’ is the difference
between the hospital’s gross
charge and what the third
party will be paying under
the reimbursement system.
Different payers have
different reimbursement
methodologies, and each
third-party payer has different
systems for reimbursing
inpatient and outpatient
services. They usually
pay less than actual
charges. The amount
of contractual
allowances
fluctuates and is an
estimate.
Generally
accepted accounting
principle (GAAP)
requires that bad debt
expense be listed as
an expense item and not
a deduction from revenue.
Many hospitals still list it as
a deduction from revenue,
producing a discrepancy with
how bad debt is listed in their
audited financial statements.
Bad debt is considered a
revenue deduction
in the case of net
revenue per patient
day and net revenue
in accounts receivable.
Expenses in hospital
accounting are fairly
straightforward. There
are two broad categories of
expenses – operating expenses
and capital expenses.
Operating expenses consist
of salary and non-salary
expenses (supplies and
materials, fringe benefits,
etc.). Capital expenses
represent the depreciation,
amortisation and interest
expense associated with
capital purchases or leases.
Conclusion
Today, in the era of rising
cost and price sensitive
customer, it is very essential
that a hospital administrator
should have knowledge and
understanding of the ABC of
hospital finance. It is a key
to the efficient operation of
any hospital and is especially
critical to the survival of the
hospital.
QT
11%
Ward
29%
Investigations
29%
Pharmacy
31%
About the author
Dr. Ashok Kumar
Khandelwal is the
Medical Director,
Anandaloke Hospital &
Neurosciences Centre,
West Bengal. He is a
trained Assessor from
the National Accreditation
Board for Hospital and
Health Care Provider
(NABH). He carries
around two decades
of experience in the
hospital industry and 15
years of experience as a
hospital administrator.
Profit &
Loss
Account
Balance
Sheet
Cash
Flow
Account
Cash
Flow
Three Key Financial Reports
May 2015_vol5 issue2 _HB.indb 38May 2015_vol5 issue2 _HB.indb 38 13-05-2015 22:50:2113-05-2015 22:50:21