Finance

1. Finance • Chris Truax • System Director, Business Development • OhioHealth

2. Finance • 20 Questions and reflects 10% of the Exam • Financial Mgmt and Financial Analysis Principles • Operating Budget Principles • Capital Budgeting Principles • Reimbursement Methodologies and Ramifications • Fundamental Productivity Measures • Financial Controls and Auditing Principles • Capitol Funding Sources • Revenue Generation • Asset Mgmt, including Facilities equipment, etc.

3. Financial Accounting • The three basic financial statements: • Balance Sheet • Income statement (statement of revenue and expenses • Statement of cash flows 3

4. Financial Accounting • Balance Sheet • Presents the financial position of the organization at a point in time – usually at the end of the fiscal year • Values assigned to the assets are accounting values and do not necessarily reflect market values. • Prepared in accordance with GAAP • Major components: • Historical cost convention • Accrual • “going concern” 4

5. Financial Accounting • Historical cost convention • Asset values are typically based on the value assigned at the time of purchase (price paid) • Accrual • Focuses on a matching of the revenues earned and the expenses incurred to provide those services, not when the cash flow actually occurs • “Going concern” • Reflects the fact that the values assigned to the assets are based on the premise that the organization will continue to perform the same type of mission (i.e.,. Health services in the case of a hospital) 5

6. Financial Accounting • Basic structure of the balance sheet • Present assets in order of liquidity and liabilities in order of payment • Values of the assets must be equal to the claims of the capital supplier 6

7. TOTAL ASSETS including: Current Assets Assets Limited as to Use Tangible Assets Intangible Assets TOTAL DEBT AND EQUITY including: Current Liabilities Long-Term Liabilities Equity/Net Worth/Funds Balance Financial Accounting = 7

8. Balance Sheet: Assets (in thousands) 8

9. Balance Sheet: Liabilities and Equity (in thousands) 9

10. Financial Accounting • The Income Statement (statement of revenues and expenses) reports the revenues and expenses of the organization over a period of time. • The bottom line of the income statement is captured in the equity section of the balance sheet. 10

11. Financial Accounting • Income statements are usually prepared in accordance with GAAP, which requires the use of the accrual basis of accounting for recognition of revenues and expenses. • Revenues and expenses reported include the value of services provided regardless of whether cash has been received • Cash expenses such as salaries • Noncash expenses such as: • Depreciation • Amortization • Bad debt expense 11

12. Financial Accounting • Noncash expenses reflect accounting allocations of 1)previous capital investment decisions and 2) the amount of revenues that have been billed but will probably not be collected in full. 12

13. Financial Accounting • Charity Care • Not shown as an expense or deduction under the revised accounting rules. • Charity Care, Other Deductions from Revenue (allowance accounts and discounts) are now shown in the footnotes of the financial statements. 13

14. Income Statement: Revenues (in thousands) 14

15. Income Statement: Expenses (in thousands) 15

16. Financial Accounting • Statement of Cash Flows uses information from balance sheet and income statements to develop a cash flow statement that explains changes in cash flows resulting from three activities: • Operating • Investing • Financing • This statement is usually prepared in accordance with GAAP. 16

17. Financial Accounting Statement of Cash Flows • Converts net income based on the accrual basis of accounting to a cash basis by adding noncash expenses back to the reported net income • Identifies cash flows from providing services, investing activities and financial activities 17

18. Financial Accounting Ratio Analysis • Primary financial tool used to assess the financial condition of an organization • Categories of ratios are: • Liquidity: ability to meet short-term obligations • Operating: use of assets and management performance • Debt: long-term survivability • Profit: management performance and ability to meet long-term obligations 18

19. Ratio Analysis • Liquidity ratios indicate an organization’s ability to meet short-term financial obligations. • Current ratio • Collection period (days in AR) • Days cash-on-hand, all sources • Days cash-on-hand, short-term sources • Average payment period 19

20. Ratio Analysis • Profitability ratios indicate an organization’s ability to survive and grow by measuring the relationship of revenues to expenses. • Operating margin • Total margin • Return on net assets 20

21. Ratio Analysis • Asset efficiency ratios indicate an organization’s ability to be efficient by measuring the relationship between revenue and assets [note: total revenue includes net non-operating gains]. • Total asset turnover • Age of plant • Fixed asset turnover • Current asset turnover • Inventory turnover 21

22. Ratio Analysis • Capital structure ratios indicate that organization’s long-term liquidity by measuring a variety of relationships to capital. • Net asset financing • Long-term debt to net assets • Debt service coverage • Cash flow-to-debt 22

23. Operating Indicators • Measure financial performance related to operations. • Average length-of-stay (LOS) • Occupancy rate • Outpatient revenue as a percentage of total patient revenue • FTE’s per occupied bed • Salary per FTE • Compensation costs per discharge 23

24. Financial Accounting • Ratio Analysis for Managed Care Organizations – focus on two major categories of expense and how they relate to the premium dollar Medical Claims Expense Ratio = Total Medical Claims Expense Premium Revenue Administrative Expense Ratio = Non-health Service Expenses Total Operating Revenue 24

25. Management Accounting • Management Accounting’s primary focus is the determination of the cost of a particular decision. • “Cost” is ambiguous and its meaning depends on the type of decision being made. 25

26. Cost Classifications • In the long-run, all costs are variable, and hence these cost classifications hold only in the short-run, say, for one year. • Also, no costs are fixed throughout an indefinite range of volumes. Thus, the concept of cost classifications according to volume must be applied within some relevant range of patient volume. 26

27. Management Accounting Key Calculations for Total Cost Decisions Total Cost = Total Fixed Cost + Total Variable Costs Per-unit costs are averages Per unit costs = TFC/Q + TVC/Q (Q = Services provided) It is important to stress that whenever you have fixed costs, you can not determine per-unit costs without specifying a volume of output. 27

28. Management Accounting Contribution Margin Approach • The relationship between fixed and variable costs and profit can also be expressed in terms of the contribution margin approach: • Contribution Margin = Price after Discounts – Variable Cost Per Unit CM = P – VCU 28

29. Management Accounting • Relationship between CM and the Income Statement $20 Average revenue per patient visit after discount -8 Average variable cost per patient visit $12 Contribution margin (CM) per patient visit Total Fixed Costs (TFC) = $240,000 BEQ (Break Even Quantity) = TFC/CM = $240,000/12 Total revenue (20,000 x $20) = $400,000 Total variable costs (20,000 x $8) = $160,000 Total contribution margin (20,000 x $12) = $240,000 Total fixed costs = $240,000 Excess of revenue over expenses = $ 0 29

30. Management Accounting Contribution Margin approach is used determine: • Break-even points/profit • Quantity • Prices • Cost categories 30

31. Financial Management Sources of Capital • Equity (or fund balance) Contributed capital Retained earnings • Debt Short-term (trade credit) Long-term (notes, bonds, leasing) 31

32. Financial Management Risk of Debt • As the amount of debt increases, the risk to the lender increases and higher interest rates follow • To maintain a stable risk profile in the capital structure, then, increased use of debt requires that additional equity also be obtained to keep the relative amounts of each source within board-established units 32

33. Financial Management Weighted Average Cost of Capital Model (WACC) • Method to measure the costs of various services of capital and the impact of the capital structure • The relative amount of debt and equity in the capital structure and the cost of each source in the marketplace are used to determine the weighted cost 33

34. Financial Management Evaluation Techniques • Economic evaluation techniques (adjusted for the time value of money) • Net Present Value • Internal Rate of Return • Accounting evaluation techniques (not adjusted for the time value of money) • Accounting Rate of Return • Pay Back 34

35. Financial Management Net Present Value (NPV) The different between the discounted cash inflows and discounted cash outflows over the life of the investment Internal Rate of Return (IRR) The discount rate, r, which, when used to discount a series of cash inflows and outflows, makes the NPV of those cash flows equal to zero. 35

36. Financial Management Accounting Rate of Return The average increase in income reported on the financial statement divided by the total or average investment Pay Back The amount of time it takes to recover the cash outflows of the investment from the cash inflows 36

37. Finance Ready for some test questions? 37

38. Finance Test Questions Which of the following is a unit measure commonly used to determine physicians’ clinical productivity? • RVU • CMS • IPO • CPU

39. Finance Test Questions Which of the following third-party reimbursement methods provides the largest financial incentive for the provider to reduce cost? • Charge-based • Cost-based • Prospective payment • Per diem

40. Finance Test Questions Statements and earnings, financial positions, changes in financial position and retained earnings are required to be submitted yearly by all: • Publically owned healthcare organizations • Privately owned healthcare organizations • Government owned healthcare organizations • Faith-based owned healthcare organizations

41. Finance Test Questions Which of the following is an Example of a capital expenditure? • Land that is purchased for resale • Surgical equipment with a useful life of six months • A building with a useful life of 20 years • Medical supplies used for patient care

42. Finance Test Questions If the amount of charity care increased from one reporting period to the next, which of the following would occur? • Provision for bad debts would increase • Unrestricted net assets would increase • Unrestricted net assets would neither, increase or decrease • Unrestricted net assets would decrease

43. Finance Test Questions Which would be a reasonable basis on which to allocate administrative overhead costs? • Salaries • Amount of supplies used • Hours worked • Square footage

44. Finance Test Questions The effective cost of debt is roughly the same for both not-for-profit and investor-owned organizations because: • Both types of organizations can issue tax-exempt debt • The interest rate is the same on both tax-exempt and regular debt • Neither type of organization can issue tax-exempt debt • The tax deductibility of interest for investor-owned firms offsets the lower coupon rate on tax-exempt debt.

45. Finance Test Questions Which of the following statements best describes the statistics budget? • It combines volume and expense rates to forecast costs • It is a profit forecast for the coming year • It combines volume and reimbursement data to forecast revenues • It provides input date for other budgets

46. Finance Test Questions Which of the following is an Example of an asset? • Accounts payable • Accrued employee benefits • Property, plant, and equipment • Unrealized gain

47. Finance Test Questions • Which statement about short-term debt reduces liquidity? • Increased use of short-term debt reduces liquidity • Short-term debt provides certainty about interest costs over time • The interest rates for short-term debt are typically higher than interest rates for long-term debt • An organization that relies on short-term debt replaces the need for working capital

48. Finance Test Questions • Cost accounting is an important tool which enables the CFO to: • Meet Joint Commission fiscal requirements • Ensure supplies are competitively purchased • Determine the actual cost of providing patient care • Improve revenue cycle returns

49. Finance Test Questions • What does a liquidity ratio measure? • A firm’s ability to meet its current obligations in a timely manner • Size of dividends to be paid to shareholders • The percent of total funds provided by creditors • Days in accounts receivable

50. Finance Test Questions • The real value of financial statements lies in the fact they can be used to help: • Predict the firm’s future financial condition • Compute total margin versus periodic gain • Relate the industry average to net profit/loss over time • Understand that a large portion of a hospitals net income may come from non-operating gains