Analysis:
Analysis of the cash flows:
The cash flow statements in this case have been derived from historical financial and operating data of the hospital. Three critical cash flows will be analyzed using graphs. These are cash flows from operations, cash flows from investing and cash flows from investing. This will be done over the 2003 to 2006 period reported.
Chart 1: Chart showing the trend of cash flows from operations from 2003 to 2006
These are cash flows that the hospital generates from offering medical services to patients. From the chart shown above the cash flow from operations has been slowly declining from 2003 through to 2006. From 2003 to 2004 there was a 25.2% reduction in the cash flow from operations. From 2004 to 2005 there was a 15.7% decrease in the cash flow from operations and lastly from 2005 to 2006 there was a 23.2% reduction in the cash flow from operation. This reduction may indicate that the hospital’s ability to pay off expenses is affected. This is mainly because
Cash flows from investing:
Chart 2: Chart showing the trend of cash flows from investing from 2003 to 2006
Information provided indicates that the hospital has been financing its activities through long term debts. From the chart it is evident that between 2004 and 2005 the hospital undertook in a heavy investment since there was a large increase in its long term debt. However, in 2006 the hospital was able to repay the debt and reduce its long term debt. This indicates that the investment that the hospital had engaged in had paid off.
The two factors that will be analyzed are ROA and ROE. From 2002 to 2005 it is evident that the ROA and ROE have been on the decline. Between 2005 and 2006 it is evident that there is an increase in both ROA and ROE. From the data analysis carried out it is clear that between 2002 and 2005 the hospital has engaged in a project or a series of project. This is mainly because during this period there was a 3.78% decline in ROA and 7.01% decline in ROE. Between 2005 and 2006 it is clear that the investment that the investment is making returns to the hospital. Examining data from 2006 (the reporting year), it is evident the hospital’s ROA is above the median industrial data for hospitals with 200-299 beds. In addition, it is below the upper industrial quartile. Also the hospital’s ROE is above the median, however, it is below the upper industrial quartile.
Using the operating analysis it is evident that the factors that explain the current financial condition of the hospital are profit indicators, volume indicators and efficiency indicators. The table below shows the selected indicators:
These are the indicators that help determine the success of the hospital since factors such as volume indicators and efficiency determine the number of patients that the hospital can be able to serve at a particular time.
Recommendation for improving cash flow:
One of the strategies that the hospital can implement in order to increase the cash flow is by increasing its bed capacity. The hospital can increase the level of revenue per year by increasing its occupancy rate. Also, the hospital can increase the level of revenue by obtaining a competitive advantage over the competitors so as to ensure it is able to attract patients due to the excellent services that it offers. In order to be able to improve its services the hospital should source out for more funds and add more capital in the form of additional current assets. The capital can be obtained from obtaining loans from banks, grants and even obtaining goods on credit from suppliers. The increase in the capital will ensure that the working capital increases and as a result, increase the cash flow in the hospital.
References:
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioner's guide. Hoboken, N.J: Wiley.
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis workbook: Step-by-step exercises and tests to help you master financial statement analysis. Hoboken N.J: Wiley.
Gibson, C. H. (2012). Financial statement analysis. Mason, Ohio: South-Western.
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Robinson, T. R., Munter, P., & Grant, J. (2003). Financial statement analysis: A global perspective. New York: Pearson Education.
Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial reporting, financial statement analysis, and valuation. Mason, Ohio: South-Western.