Section I Analysis of Statement of Operations
What is happening with the revenue?
There is not enough historical data to assess whether the revenue’s performance is good or bad. But if looking at how it affects income, the YTD shows that revenue is enough to cover allowances for doubtful accounts and operating expenses while the current month reported a net loss. As pointed out in the difficulties experienced by the hospital, it may be the increasing competition and excessive staff overtime, reflected in dwindling revenue (as % shows approximately 7% decline) and almost 5% addition in contractual allowances and salaries and wages.
What are allowances? Should these ever be a positive number? Why?
According to Fingers (2010), allowances are crucial for each company to conservatively evaluate its receivables (which will be subject to the calculation of the company’s accountant or controller) in order to adjust for uncollectible and bad debts and it is also according to conservatism principle. They should always be negative amounts because it will account for fortuitous expenses but the estimation should just be carefully measured because overvaluation and undervaluation would lead to incorrect reporting for both income and assets.
Can allowances be reduced? How?
Reduction of the default rate, prediction of loyal customers, and economic boom forecast could become factors in lighter estimation of allowances (Fingers, 2010). But, accountants should always choose the most conservative way to calculation to prevent in overstating receivables and understating income levels (Fingers, 2010).
Is the organization profitable?
Based on the YTD statement of operations, Atlantic Medical Center is barely making the company afloat and the current month follows the continual downgrade of the company by reporting a net loss. The profit only accounts for only almost 2% of gross revenue in YTD; the chunk of the revenue is being eaten up by contractual allowances which accounts for more than 70% of the revenue.
What are the major concerns that you see in the Statement of Operations? What areas would you target for expense reduction and why?
Some major concerns with the company’s operations are excessive allowances for contractual employees, misalignment of charity work, human resource strategies, and supplies purchasing control. The first area for improvement would be the employee compensation. The salary of contractual workers accounts for more than 70% of the revenue. This calls for urgent prioritization because on top of that is another 10% contribution from salaries and wages and almost 2% from employee benefits. Atlantic Medical Center ought to revisit its labor and hiring policies and procedures and provide other means of incentive for regularization and benefit packages. Another area of expense reduction is doing charity care, we get that the company’s vision is to be ‘the hospital of choice’ but they should first look if they have enough funds to afford free or discounted services. Last is the purchasing of supplies, it seems repairs and maintenance expense is lacking in the operations expense while the charity appropriation is a bonus, it only accounts for less than 1% of revenue. Although inventory requires that new supplies and other hospital equipment be replenished, the organization should also estimate the number of patients and properly ration them to avoid shelving of supplies.
Section II Analysis of Financial Ratios
What do liquidity ratios tell us about the organization? What are the latest results telling us about this organization? Why is this important?
Liquidity ratios show the ability of a company to pay its short term debt and always measure by using asset and liability entries to calculate cash convertibility (Subramanyam et al, 2009). It is important tool for creditors in analyzing the turnaround of debt obligation payments. This organization is pointing towards deteriorating liquidity. Current, quick, and acid ratio shows the rate of current liabilities is bigger than current assets meanwhile collection and payment period displays that it takes longer to collect and lengthier time to pay its dues.
What do profitability ratios tell us about an organization? What are the latest results telling us about this organization?
Profitability ratios show the ability of a company to generate earnings to measure both management effectiveness and stock market ratios (Subramanyam et al, 2009). It is an important tool for client and stakeholders in assessing the rewards of their investments. This organization’s operating margin decreased by 1.3% indicating higher revenue which is good. It is coupled with increased turnover rate for asset which is only justified because hospitals use machines and other facilities to operate. What is impressive is its increase in return on assets meaning performance is improving from 2014 and way above the industry standards.
What do capital structure ratios tell us about an organization? What are the latest results telling us about this organization?
Capital structure ratio is synonymous to solvency ratio which shows the ability of the company’s debt to equity and the status of financing its obligation (Subramanyam et al, 2009). It is important for both creditors and stakeholders to know if the company is still solvent enough to pay its dues rather than relying on the company’s equity. This organization is quite solvent in a sense that all solvency ratio indicate increase cash flow to finance debt although long term debt to net assets increased, it can only mean that it is strategizing to amortize its loans for a long haul.
The average daily census is going down. Considering what you know about the future of health care, should the management be concerned?
These days, more people choose to have a healthy lifestyle. There is a saying that ‘prevention is better than cure.’ Based on trend observation, being fit and healthy is a fad which maybe a contributing factor on why the average daily census is declining. The management just needs to re-focus and realign their services and concentrate on departments with most cases on inpatients. Health care is still important for aging generation hence the time to concentrate on a particular initiative which is to increase volume on new and expanded programs. Also, Doorn (2015) added that health care is the primary driver of earnings growth due to medical card utilization hence the future of health care doesn’t sound so bleak because investors would be flocking to invests in health care stocks.
What is case mix index? What are these results telling us about the organization?
As part of the management staff, and looking at the total picture, what would your recommendations be to the hospital leadership?
My recommendation would be on Section I #5 for its operations. For its overall performance given the financial ratios, it is to focus on liquidity efforts by increasing cash flows from operations. There would be more incentive if they strive to push through their initiatives in addressing mostly operational issues such as staff retention and overtimes, orientation expenses reduction, and profit margin efforts.
Section III Budgeting
What are some important considerations in developing a personnel budget?
Based on the personnel budget form, the important considerations include the nature of position, FTEs, and salary.
Looking at the projected revenue and the personnel and supply budget, what do you project as the net revenue for year one? Do you anticipate a difference in year 2? Why?
Reduction of contractual workers and finding other means of employee benefits would have an estimate of 20% increase in net operating income. The proposed increase in net revenue would be a conservative 2% given the tough competition and slow decline in average daily census data. It is difficult to have an accurate forecast given the limited amount of data but for sure if the medical center continued its efforts, it would pose more revenue for Year 2.
In what way(s) is your program consistent with the strategic objectives? Do you anticipate it will improve the financial ratios? How?
Given 30 bed patient units for conversion, I would allocate them to top three HPPD which are Pediatric Oncology / Critical Care, Psychiatry, Inpatient, and Neonatal ICU. Since the primary source of income comes from inpatients, it would be justified to enhance the unit types with most HPPD and accommodating inpatients. This would inadvertently improve financial ratios by increasing assets (through cash and cash equivalents and accounts receivables) and equity (though retained earnings and net income).
References
Doorn, P. V. (2015).Opinion: Health-care stocks may be your best bet today. Retrieved from: http://www.marketwatch.com/story/health-care-stocks-may-be-your-best-bet-today-2015-09-24
Fingers, C. (2010).Using Judgment to Measure the Allowance for Doubtful Accounts. Global Perspectives on Accounting Education, 7(2010), 9-17.
What does case-mix index mean to you? Association of Clinical Documentation Improvement Specialists. (2010, May 6). Retrieved from http://www.hcpro.com/HOM-250674-5728/What-does-casemix-index-mean-to-you.html
Subramanyam, K.R., Wild, J. and Halsey, R. (2009). Financial statement analysis (10th ed.). Boston: McGrawHill-Irwin.
