A brief concept of Financial Management in Hospitals

1. Financial Management in Hospital
Brigadier General Dr Zulfiquer Ahmed Amin
M Phil, MPH, PGD (Health Economics), MBBS
North South University

2. Financial Management means planning, organizing, directing and
controlling the financial activities, such as procurement and
utilization of funds of the enterprise. It means applying general
management principles to financial resources of the enterprise.
What is Financial Management

3. Objectives of financial management
1. Profit maximization: Profit maximization is the process by which a
business arranges its prices and cost structure to achieve the highest
possible profit.
2. Wealth maximization: Wealth maximization is the concept of
increasing the value of a business in order to enhance the value of the
shares held by its stockholders.
3. Company survival: Effective financial management helps a company
to avoid bankruptcy and stay in existence, which means that
employees continue to have jobs, products and services continue to
reach the market, and patients continue to get quality care.

4. 4. Cash flow maintenance: Managing cash flow keeps money
available for daily expenses, including the purchase of raw materials
to produce goods and the payment of utilities and salaries.
5. Capital cost minimization: Raising capital (Land, buildings,
construction, equipment) involves spending money on interest, fees
and other costs. Keeping these expenses under control contributes
directly to profits.
6. Funds estimation: Businesses must make the best estimate of
how much money is needed to operate in the short and long term.
7. Capital structure determination: Financial managers determine
the right mix of debt and equity to finances operation and growth.

5. Profit vs Wealth Maximization
Profit Maximization Wealth Maximization
Profit is what remains out of the total
revenue after paying for all the
expenses and taxes for the financial
year.
Ability of the company to increase the
value of company’s share of the
stakeholders over some time
To increase the profit, companies can
either try to increase the price or try to
minimize their cost structure.
The value depends on several tangible
and intangible factors like sales, quality
of products or services, brand name etc.
Focus is on short-term earnings
Focuses on increasing the value of the
stakeholders in the long term.

6. Functions of Financial Management

7. Investment Decisions include outflow of cash, Financing Decisions
includes an Inflow of cash (through borrowing, or investment from
outside sources), and Dividend Decision includes distribution of
profits to shareholders.

8. 1. Investment decisions:
A firm needs to decide where to invest in order to gain the highest
returns. The decision of investing funds in the long term assets (Fixed
Assets) is known as Capital Budgeting. The investment made in the
current assets or short term assets is termed as Working Capital
Management.

9. 2. Financing Decision
Financing decision is, concerned with the decisions about how much
to be raised from which source for execution of investment decision.
The main sources of funds for a firm are shareholders funds (Equity
capital and retained earnings), and borrowed funds, raised as
debentures or other forms of debt.

10. Points of
differences
Financing Decisions Investment Decisions
Meaning
It tells about the source from where
the capital can be raised.
The decisions regarding the
investment of funds for getting
maximum benefits for the firm.
Sources
Owner’s Funds include Share
capital, Retained earnings. Whereas
debentures, loans, bonds are
included in borrowed funds.
Long-term capital decision:
Related to buying Machinery
for Production, Purchase Land,
and building for expansion.
Short term capital decisions:
Related to expenses for day-to-
day activities.
Functions
Financing Decisions includes an
Inflow of cash.
Investment Decisions include
outflow of cash.
Differences Between Financing and Investment Decision

11. 3. Dividend decision:
The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
• Decision of amount of Dividend for shareholders: A dividend is a
token reward paid to the shareholders for their investment in a
company's equity, taken from a part of company's net profits.
• Decision of amount of Retained profits: Amount of retained
profits has to be finalized which will depend upon expansion and
diversification plans of the enterprise.

12. Accounting vs Financial Management
Accounting is generating,
processing and analyzing
financial information of an
enterprise
Financial Management is utilizing
financial information for decision
making

13. What are Cost, Price and Value
- Cost is typically the expense incurred for making a product or
service.
- Price is what the market thinks something is worth and what we
pay for it.
- Value is what you think it is worth. Value is the utility of a good or
service to a customer.

15. Responsibilities of Finance Manager

16. Financial Planning
Financial planning is the process of documenting a business' current
financial situation and identifying financial goals and how the
business will achieve them.

17. Identification of Sources
A source of finance, refers to where a business gets money from to
fund their business activities. A business can gain finance from either
internal or external sources.

18. The factors affecting the choice of sources of funds are the cost that it
will incur to raise funds, the purpose and the duration for which the
funds are to be raised and the risk that a company has to bear to raise
those funds.

19. Investment of Funds
Investment of fund is the decision to utilize money to make business.

20. Raising of Funds
It is a financial investment in a Company by the owner or external
personal for expansion, product development, assets purchase, and
debt restructuring.

21. Bootstrap:
Bootstrapping is the process of using own resources for a business.
Crowdfunding:
Crowdfunding is the process of using the audience of the World Wide Web
to gradually raise small amounts of funding from a large amount of people.
Angel investors:
Angel investor is someone who has the capability to provide a large
amount of funding.
Venture capitalist:
Venture capitalist buys equity of an entrepreneur, stays for a short period
of time, and then exits with profits.
Business Incubators:
Business Incubators are the companies that assist startup owners with the
necessary support.
Startup accelerator:
A startup accelerator, is a business program that supports early-stage, of
growth-driven companies for a fixed period of time.

22. Protection of Fund
Asset protection is about protecting the business assets from the
threat of business liabilities, such as debt obligations, claims of
creditors, claims for damages, liability, and misappropriation etc.

23. Protect Liability
Every business entity needs liability coverage by insurance to protect
them from injury claims.
Data Security
This applies to everything from a client’s credit card number to
mailing lists to employee/patients’ information and intellectual
property.
Relationships with Suppliers
it’s impossible to keep business running without suppliers of raw
materials. It is important to keep relationships with suppliers positive.
Safeguard Cash Reserves
Cash can be slipped into a pocket and carried off without a trace. So,
proper accounting is important.

24. Distribution of profits
Profit distribution decisions - relating to the proportion of profits
earned that should be retained to finance development and growth
of the company and the proportion which may be distributed to
owners as immediate returns.

25. Record Keeping of Financial Functions
A Balance Sheet is a financial statement that reports a company's
assets, liabilities, and shareholder equity. It is a financial statements
that are used to evaluate a business. It provides a snapshot of a
company's finances (what it owns and owes).
The balance sheet is based on the fundamental equation:
Assets = Liabilities + Equity.
Balance Sheet

26. The balance sheet is divided into two sides (or sections). The left side of the balance
sheet outlines all of a company’s assets. On the right side, the balance sheet
outlines the company’s liabilities and shareholders’ equity.

28. Glossary of Terms in Balance Sheet
• Assets:
An asset is anything of value or a resource of value that can be
converted into cash. eg, hospital building, land, goods, machineries,
equipments, vehicles, cash, investments, materials.
• Cash equivalents:
Cash equivalents are any short-term investment securities with
maturity periods of 90 days or less, eg, treasury bills, govt bonds.
• Inventory:
Inventory is the raw materials used to produce goods, as well as the
goods that are available for sale.

29. • Accounts Receivable:
Accounts receivable (AR) is the balance of money due to a firm for
goods or services delivered or used but not yet paid for by
customers.
• Prepaid Expense:
Prepaid expenses are future expenses that are paid in advance. On
the balance sheet, prepaid expenses are first recorded as an asset.
After the benefits of the assets are realized over time, the amount is
then recorded as an expense. e.g. Advance Rent.

30. • Investments:
An investment is an asset or item acquired with the goal of
generating income or appreciation. Appreciation refers to an increase
in the value of an asset .
• Intangible Assets:
An intangible asset is a non-physical asset that has a multi-period
useful life. e.g. patents, copyrights, literary works, trademarks, and
broadcast rights.

31. • Liability:
A liability is how much the hospital owes, recorded on the right side
of the balance sheet. Liabilities are incurred in order to fund the
ongoing activities of a business. Examples of liabilities are wages
payable, taxes payable, loans, mortgages etc.
• Accounts Payable:
Accounts payable (AP) are amounts due to vendors or suppliers for
goods or services received that have not yet been paid for, shown as a
liability on a company's balance sheet. It does not accrue interest.

32. • Notes Payable:
A note payable is a written agreement, when a borrower obtains a
specific amount of money from a lender and promises to pay it back
with interest over a predetermined time period.
• Accrued Expenses:
Accrued Expenses are expenses that have been incurred and for
which the payment has not yet been made. This expense is recorded
in the expense book, but paid later. eg, taxes, commission etc
• Deferred Revenues:
Deferred revenue is money received in advance for products or
services that are going to be performed in the future. Advance
money received for flat, before erection of building.

33. • Equity:
Equity measures the value of ownership. In other words, it's how
much someone could get paid for selling something they own.
• Common Stock:
Common stock, is typically the stock held by founders and
employees. eg, share of a company.
•Additional Paid-in Capital
Additional Paid in capital also known as Capital surplus, is the excess
of amount the company receives over and above the par value of
shares, from the investors during the time of an IPO. eg, share value
10 Tk, investors buy at 50 Tk per share.

34. • Retained Earnings:
Retained earnings are the cumulative profits that remain after a
company pays dividends to its shareholders. These funds may be
reinvested back into the business for expansion of business.
• Treasury Stock:
A treasury stock is stock which is bought back by the issuing company
from the public investors, reducing the amount of outstanding stock
on the open market.

35. • Cost-Effectiveness Ratio:
A cost-effectiveness ratio is the net cost divided by changes in health
outcomes. Examples include cost per case of disease prevented or cost per
death averted. If Drug-A and Drug-B have CER of 15,000/-tk and 20,000/- tk
respectively to save each life; than Drug A is preferred in economics.
Glossary of Financial Terms

36. • Cost–Benefit Ratio (CBR)
A CBR is the ratio of the benefits of a project or proposal, expressed
in monetary terms, relative to its costs.

37. Capital Expenditures
Capital expenditures (CapEx) are funds used by a company to acquire,
upgrade, and maintain physical assets with large investment of a
permanent or long-standing nature. eg, property, plants, buildings,
technology, equipment, etc

38. Depreciation:
Depreciation is a way to calculate the reduction in value of an asset
due to use, wear and tear, and obsolescence in course of time. The
value of most assets decreases over time after their purchase. This
loss is reflected as an expense. Medical Equipments: 5-7 years.

39. • Revenue Centers
A revenue center is a distinct operating unit of a business that is
responsible for generating sales or income. OPD, IPD, Investigation
Facilities, etc.
• Cost Centers
A cost centre is a centre of activity to which incurs costs. Generally,
every dept and facility of a hospital is a cost centre, which needs
money for its operation and maintenance.

40. • Cost
In accounting term: Cost is the expenditure required to create and sell
products and services, or to acquire assets.
In economic term: Economic cost includes both the actual direct costs
(accounting costs) plus the opportunity cost (The gain foregone by not
choosing the next-best alternative decision). A student spends three hours and Tk
300/- at a movies the night before exam. The opportunity cost is time spent studying and that money to
spend on something else.
• Standard Costing
Standard cost is an estimated cost determined in advance of
production or supply.

41. • Direct Cost:
Direct costs are the expenses a business incurs directly to make a
product or service.
• Indirect Cost:
Indirect costs represent the expenses of doing business that are not
readily identified with a particular function or activity, but are
necessary for conduct of activities. eg, administrative salaries, office
expenses, rent, security expenses, telephone expenses, and utilities.

42. • Overhead Cost
Overhead costs refer to those expenses associated with running a
business that can't be linked directly to creating or producing a
product or service. eg, administrative cost, insurance, utilities,
security etc.
• Operating Cost
Operating cost is also called recurrent cost- the cost of operating an
enterprise or service, that vary with level of output (eg, quantity of
drugs).

43. • Fixed Cost
Fixed costs remain the same regardless of whether goods or services
are produced or not. Hospitals must maintain some basic staffs,
physical facilities, bill for water, electricity, rent, taxes, depreciation,
interest on borrowed capital etc and do not change whether there is
production or not.
• Variable Cost:
Cost that varies depending on the quantity of production. This means
that variable costs increase as production rises and decrease as
production falls.

44. • Average Cost:
It is the per unit cost of production obtained by dividing the total cost
(TC) by the total output (Q) or mathematically expressed, AC = TC/Q
• Marginal Cost:
The change in the total cost at a given scale of output, when a little
more or a little less output is produced.

45. Rate Setting
The process of determining how much to charge for a product. In
rate setting, one usually considers expected expenses such as direct
and indirect costs plus one's target profit. One may also consider
other factors, such as competitors' prices, govt policy etc.
Sometimes, rate setting is a means of regulating hospital rates is
done by the health authority. Rate setting intends to prevent
discriminatory pricing by providers, has the potential for significant
and sustained cost containment.

46. Hospital Budget
Hospital budgeting is the process of estimating proposed
expenditure and the means of financing these expenditures. There
are 3 types of budget.

47. Capital Budget:
Capital Budget is a budget, allocating money for the acquisition of fixed
assets such as land, buildings, machinery, real estate, new technology and
equipment. Capital budgeting makes decisions about the long-term
investment of a company's capital.

48. Cash Budget
A cash budget is a company's estimation of cash inflows and
outflows over a specific period of time. A company will use a cash
budget to determine whether it has sufficient cash to continue
operating over the given time frame. The cash budget typically
consists of two sections, which include precise estimates of (i) cash
receipts and (ii) cash disbursements.

49. • Operating Budget
An operating budget is typically formulated by the management
team just prior to the beginning of the year, and shows expected
day-to-day revenues and expenses expected for the entire year.
eg, Depreciation

50. Operating Budget: 31 December 2021

52. Steps of Budget
1st: Assumptions of quantitative output: Hospital Administrator will
prepare assumptions, in statistical terms, about the kind of services
(Outputs) the hospital expects to provide. e.g. patient days of service,
number of procedures by depts (Operation, Radiology, physiotherapy
etc), projected patient statistics, any additional services etc.
2nd: Economic forecast: Hospital Administrator will prepare economic
forecast, in respect of new developments, or other factors that can
influence the hospital’s income or expenditure during the budget
period (Like new services, specialist or super-specialist services,
inflation, govt regulations etc).

53. 3rd: Budget goals and policies: Hospital Administrator will outline the
budget goals and policies as per the directives of the governing body,
or board of trustees. With the support of Finance Officer , he will
constitute a tentative financial plan, which will include financial
strategy, target profit etc.
4th: Budget Package: Finance Officer prepares a Budget Package,
incorporating budgeting procedure to be followed, goals, policies,
assumptions, schedules, and past data as applicable. He passes the
budget package to all dept-heads to enable them to prepare
preliminary departmental budget.

54. 5th: Dept Expense Budget: The dept-heads prepare their expense
budget, including departmental goals and policies, considering the
departmental operations and performances.
6th: Summary of Departmental Budget: Summary of each
department’s budget-hearing takes place. After a joint analysis by
Hospital Administrator, Finance Officer and HoD, departmental budget
is prepared.

55. 7th: Dept Revenue Budget: Finance Officer develops the dept’s
revenue budget, summarize departmental expense budget, and
forward the dept’s proposed budget summary to concerned dept-
heads.
8th: Operating and Cash Budget: Finance Officer prepares a preliminary
Operating Budget for the whole hospital, by summarizing and collating
the individual dept’s budget. Finance Officer also prepares a Cash
Budget for the dept. If expected revenue does not cover the expense,
Finance Officer may propose increase in price of services or cut some
expenditures of depts.

56. 9th: Preparation of total budget for entire hospital: Finance Officer will
summarize the entire budget (Including capital, operating and cash
budget) into a proper budget format, including statistical summaries.
10th: Budget Approval: Budget is presented by the Finance officer to
the Governing Board, or Board of Trustees or the finance committee
for approval. If approved, is communicated to all concerned for its
execution. Necessary follow-up is done to make any amendment.

57. Budgetary Control
Budgetary control is a financial terminology for managing income
and expenditure. In practice it means regularly comparing actual
income or expenditure to planned income or expenditure to identify
whether or not corrective action is required.

58. Budget Variances
Budget Variance or variation is differences between forecasted
budget and actual cost. The causes are as follows:
-Changing economic conditions: Any changes to usual business
conditions at the time of creating a budget can cause variances. eg,
cost of raw materials might increase due to shortages.

59. -Accounting errors:
Simple human error. eg, mathematical errors.
-Inaccurate expectations:
Over or understated expectations in terms of revenues and costs.
-Employee fraudulence.
-Changes to operations:
Any changes in operational systems could lead to positive or
negative budget variances. eg, new machinery that makes workflow
more efficient.
-Changes in Healthcare costs:

60. Causes of Increased Healthcare Cost
- Change in disease pattern due to life style changes.
-Shifts in patients demand (eg, Preventive to Curative services)
- Increased competition for core patient services (eg, MRI/CT Scan)
- Repercussions of any pandemic (eg, ICU/HFNC in COVID-19)
- The changing character of the service (eg, Profit mongering)
- Technology development (eg, High tech equipments)
- Changing health status (eg, Increased heart diseases due to junk-food)

61. -Increasing proliferation of specialties and sub-specialties
-Defensive medicine (eg, Unnecessary Caesarean Section for delivery)
-Lack of awareness of economy and productivity
-Malpractices (Unnecessary diagnostics, privileges taken from
Pharmaceuticals)
-Changes in global economy (Increase price of all commodities)
-Polypharmacy
-Fear of malpractice lawsuits (Some doctors prescribe unnecessary
tests or treatment out of fear of facing a lawsuit).
-Lack of information to patients.

62. Cost Containment
Cost containment is the practice of controlling expenses, and
allowing businesses to improve profitability and offering healthcare
services at a reasonable price.
1. Reduce cost of input resources. eg, Labor, and consumables.
2. Bulk purchase of raw materials.
3. Shared services, eg, laundry, diet, CSSD etc
4. Efficient Material Management.
5. Making better use of IT
6. Wastage control
7. Reducing operating expenses that don’t contribute to better care.
8. Diminishing redundancies in diagnostic testing
9. Ethical practices by the professionals

63. 10. Improve efficiency
- Reduction of unnecessary staffs, machines, procedures etc
- Elimination of duplications
- Investment in capital expenditures reviewed thoroughly.
11. Reduce operation cost. eg, Energy conservation.
12. Volume reduction. eg, Reduce duration of hospital stay.
13. Emphasis on OPD services.
14. Eliminate pilferage.
15. Use of Cost-Benefit and Cost-Effective analysis.

64. 16. Value Engineering:
Value engineering promotes the substitution of materials and
methods with less expensive alternatives, without sacrificing
functionality.
17. Developing in-house servicing and maintenance facility.
18. Good security and vigilance.
19. Develop cost-containment awareness among all staffs of
hospitals.

65. Health Financing Problems in Bangladesh
-Lack of fund:
Proposed 5.4% of budget in heath for 2022-23 (WHO Recommend:
12-15%), which is only 0.84% of GDP (WHO Recommend: 5%; India:
2.1%)
-Mal-distribution of resources
-Raising cost of medical care
-Inappropriate use of resources
-Inefficiency in spending

66. -Lack of planning and coordination in health financing
-Corruption.
-Absence of Health Insurance Mechanism.
-Out-of-pocket healthcare expenditures of households in Bangladesh
comprise 64.3% share of the total health expenditure.
-Catastrophic healthcare expenditure (more than 10% of annual
income) pushes 0.5 million into poverty every year in Bangladesh.

68. CONCLUSION
Any public procurement in Bangladesh is regulated by Public
Procurement Act-2006 and Public Procurement Rule-2008 to
regulate transparency of financial activities. Financial Management
is about managing and growing money. To ensure a best possible
health outcome from limited resources, a strong financial
management system in health sector is a must.