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Financial Management Study Guide by Edward McKillip FACHE

Dive into financial accounting, managerial accounting, and financial management with this comprehensive study guide presented by Edward McKillip, FACHE Director of Finance at Main Line Health. Learn about financial statements, cash flow, ratio analysis, cost information, and capital investment decisions.

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Financial Management Study Guide by Edward McKillip FACHE

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  1. FACHE BOG ExamStudy Group FINANCE Presented by: Edward McKillip, FACHE Director of Finance, Main Line Health

  2. Agenda • Financial Accounting • Managerial Accounting • Financial Management

  3. Financial Accounting • Financial Statement A. Revenue B. Expenses

  4. Financial Statement Revenue: • Gross Revenue • Net Revenue • Capitation • Patient Ledger Data • Non-Operating Revenue

  5. Financial Statements • Labor & Fringe Benefits • Net Revenue • Supplies • Equipment • Facilities Expenses:

  6. Financial Accounting Cont. Non-Operating Transactions • Cash Flow Statements & Balance Sheets • Sale/purchase of assets • Incurrence/retirement of Debt • Sale of equity in a for-profit company

  7. Balance Sheet Assets= Liabilities + Equity

  8. Sample Financial Statement

  9. Cash Flow Statements Convert Net Income from accrual based accounting to Cash by adding non-cash expenses back to Net Income. Identifies Cash Flows from providing services, investing and financing activities. Is your organization generating enough income to meet both your short-term and long-term needs.

  10. Sample Cash Flow Statement

  11. Ratio Analysis 4 Different Categories: • Liquidity • Operating • Debt • Profit

  12. Liquidity Ratios Current Ratio = total current assets total current liabilities Acid Test Ratio = cash, marketable securities and Net A/R total current liabilities Collection Period = net accounts receivable average daily operating revenue Days Cash on Hand = cash, marketable securities (operating expenses-depreciation expense)/365

  13. Operating Analysis • Total Asset Turnover • Fixed Asset Turnover

  14. Debt Analysis Long-term debt to fixed asset = long-term debt fixed assets owned Long-term debt to equity = long-term debt equity Debt Service Coverage = (rev-exp) + interest exp + deprec exp Interest expense + principal payments

  15. Profit Analysis Operating Margin Return of Assets Profit Margin

  16. Common Managed Care Rations Medical Claims Expense Ratio = Total Medical Claims Expense Premium Revenue Administrative Expense Ratio = Non-health Service Expense Total Operating Expense

  17. Managerial Accounting Decisions that require cost information: • Pricing (short/long range) • Capital Investment • Discontinuance/sales values • Performance Evaluation

  18. Managerial Accounting Two ways to classify costs: • Relationship to sub-unit being analyzed • Relationship to the volume (amount) of services provided.

  19. Managerial Accounting Total Cost = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Per Unit = TFC + TVC Volume Volume Breakeven Point = TFC CM = Contribution Margin Quantity Equation = TFC + Margin CM Rate Setting Equation = TFC + TVC + Margin CM Contribution Margin = Revenue per Unit – VC per Unit = Price – VC per Unit

  20. Managerial Accounting • Fixed Costs allocated to departments for • Cost Allocations • Cost Process

  21. Managerial Accounting • Cost Allocations vary based on: 1. Allocation Method • Allocation base • Responsibility Center • Depreciation Method.

  22. Managerial Accounting Cost Process requires: • Definition of Cost Centers • Determine Direct Costs of support service centers. • Allocate support cost to service cost centers to determine total costs. • Determine unit cost by dividing total center costs by number of unites provided.

  23. Managerial Accounting Direct Costs Indirect Costs

  24. Indirect Costs Several Key Responsible Centers: 1. Cost Centers – Input only measuresd. 2. Revenue Center – Output only measured. 3. Profit Center – Input and Outputs measured. 4. Investment Center – Inputs and Outputs measured in relation to amount of investment.

  25. Financial Management Capital requirements of the organization are - Costs of doing business. - Costs of staying in business. - Costs of changing business. - Returns of supplies of capital.

  26. Financial Management The Accounting and Economic Costs are • Accounting costs are outputs of the accounting system. • Accounting break-even occurs when revenues = expenses. • Economic costs reflect current market value. • Economic break-even includes a return to all suppliers of capital and requires that total financial requirements be met.

  27. Financial Management Understanding the impact of the Economic Decision: 1. Opportunity Costs 2. Incremental Costs 3. Sunk Costs

  28. Capital Investment Two Key Decision makers: 1. Source of Capital 2. Use of Capital

  29. Capital Investment 2 sources of capital: A. Equity - Contributed Capital - Retained Earnings B. Debt - Short-term Debt - Long-term Debt

  30. Capital Investment Inputs to determine the rate of return on the capital investment: • Cash Flow • Economic Life • Discount Rate • Impact of taxation and/or cost-based reimbursement

  31. Evaluation Techniques Economic Evaluation Technique - Net Present Value (NPV) Accounting Evaluation Techniques Accounting Rate of Return = Average Annual Cash Flow Total Cash Flow

  32. Capital Budgeting Types of capital expenditures: • Land • Land Improvements • Buildings • Fixed equipment • Major moveable equipment • Major repairs

  33. Types of capital expenditure budgets: Replacement - examples • To replace equipment at the end of useful life. • To improve productivity. • To improve quality or because it is required by regulation. New – examples • Expanded service. • Improve safety conditions. • Reduce operating expenses. • Improve patient care.

  34. Capital Budget Process • Budget committee identifies and prioritizes all capital requets. • Department managers project and budget committee confirms cash flows for each capital request. • Budget committee or CFO performs financial analysis on all the requests. • Department manager requesting the capital expenditure identifies non-financial benefits for the request. (ie. Community need or Medical staff policies). • Budget committee evaluates the financial and non-financial benefit for each request and makes decisions.

  35. Evaluating Capital Budgeting Performance Long-term debt-to-net assets = Long Term Debt Net Assets

  36. References Managerial Accounting • Managerial Accounting: An Introduction to Concepts, Methods, and Uses by Maher, Stickney & Weil, 1997. Orlando: Harcourt Brace & Company • The Financial Management of Hospitals and Healthcare Organizations by Michael Norwicki, 1999, Chicago: Health Administration Press • Fundamentals of Financial Management, by Eugene Brigham, 1995, Orlando: Harcourt Brace & Company 36

  37. References Financial Management • The Financial Management of Hospitals and Healthcare Organizations, Fourth Edition, “Capital Budgeting” pp. 187-198 by Michael Nowicki, EdD, FACHE, FHFMA 37

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