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FACHE BOG Exam
Study Group
FINANCE
Presented by: Edward McKillip, FACHE Director
of Finance, Main Line Health
Agenda
• Financial Accounting
• Managerial Accounting
• Financial Management
2
Financial Accounting
• Financial Statement
A. Revenue
B. Expenses
3
Financial Statement
Revenue:
• Gross Revenue
• Net Revenue
• Capitation
• Patient Ledger Data
• Non-Operating Revenue
4
Financial Statements
Expenses:
•
•
•
•
•
Labor & Fringe Benefits
Net Revenue
Supplies
Equipment
Facilities
5
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
6
Balance Sheet
Assets= Liabilities + Equity
ASEETS
Current Assets
-Cash
- Marketable Securities
- Accounts Receivable
- Inventories (supplies, products)
Assets Limited as to Use (Fixed Assets)
- Plant
- Equipment
Intangible Assets
- Accumulated Depreciation
Total Assets =
LIABILITIES AND EQUITY
Current Liabilities
- Accounts Payable
- Notes Payable
- Accruals
Long-term Liabilities
- Bonds
Total Liabilities
Equity (Net Worth or Fund Balance)
- Paid-in Capital (grants, contributions)
- Retained Earnings
Total Liabilities and Equity
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Sample Financial Statement
REVENUES:
Gross Charges
Contractual Allowances
Net Revenue
Other Operating Revenue
TOTAL REVENUE
EXPENSES:
Salaries
Fringe benefits
Office Supplies
Medical Supplies
Operating Contracts
Insurance
Other Expenses
Depreciation
TOTAL EXPENSES
Contribution Margin
Indirect Expenses
Non-Operating Gains (Losses)
NET INCOME OR (LOSS)
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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.
9
Sample Cash Flow Statement
NET INCOME OR (LOSS)
+ Non-Cash Expenses
- Net Working capital
(A) Net Cash Flow from Operations
(B) Fixed Asset Acquisitions
©
Long Term Debt
(D) Non-Operating Gains
(E) Net Increase (Decrease) in Cash (E= A+B+C+D)
(F) Beginiing Cash and Investments
(G) Ending Cash and Investments (G=E+F)
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Ratio Analysis
4 Different Categories:
• Liquidity
• Operating
• Debt
• Profit
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
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Operating Analysis
• Total Asset Turnover
• Fixed Asset Turnover
13
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
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Profit Analysis
• Operating Margin
• Return of Assets
• Profit Margin
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Common Managed Care
Rations
Medical Claims Expense Ratio = Total Medical Claims Expense
Premium Revenue
Administrative Expense Ratio = Non-health Service Expense
Total Operating Expense
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Managerial Accounting
Decisions that require cost information:
• Pricing (short/long range)
• Capital Investment
• Discontinuance/sales values
• Performance Evaluation
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Managerial Accounting
Two ways to classify costs:
• Relationship to sub-unit being analyzed
• Relationship to the volume (amount) of
services provided.
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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
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Managerial Accounting
• Fixed Costs allocated to departments for
1. Cost Allocations
2. Cost Process
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Managerial Accounting
•
Cost Allocations vary based on:
1. Allocation Method
2. Allocation base
3. Responsibility Center
4. Depreciation Method.
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Managerial Accounting
Cost Process requires:
1. Definition of Cost Centers
2. Determine Direct Costs of support service
centers.
3. Allocate support cost to service cost centers
to determine total costs.
4. Determine unit cost by dividing total center
costs by number of unites provided.
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Managerial Accounting
• Direct Costs
• Indirect Costs
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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.
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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.
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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.
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Financial Management
Understanding the impact of the Economic
Decision:
1. Opportunity Costs
2. Incremental Costs
3. Sunk Costs
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Capital Investment
Two Key Decision makers:
1. Source of Capital
2. Use of Capital
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Capital Investment
2 sources of capital:
A. Equity
- Contributed Capital
- Retained Earnings
B. Debt
- Short-term Debt
- Long-term Debt
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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
30
Evaluation Techniques
Economic Evaluation Technique
- Net Present Value (NPV)
Accounting Evaluation Techniques
Accounting Rate of Return = Average Annual Cash Flow
Total Cash Flow
31
Capital Budgeting
Types of capital expenditures:
•
•
•
•
•
•
Land
Land Improvements
Buildings
Fixed equipment
Major moveable equipment
Major repairs
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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.
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Capital Budget Process
1.
2.
3.
4.
5.
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.
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Evaluating Capital Budgeting
Performance
Long-term debt-to-net assets = Long Term Debt
Net Assets
35
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
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References
Financial Management
• The Financial Management of Hospitals
and Healthcare Organizations, Fourth
Edition, “Capital Budgeting” pp. 187-198
by Michael Nowicki, EdD, FACHE, FHFMA
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