FINANCE Ed McKillip Director of Finance Main Line Health

Transcription

1 FACHE BOG Exam Study Group FINANCE Ed McKillip Director of Finance Main Line Health

2 Agenda Financial Accounting Managerial Accounting Financial Management 2

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

4 Financial Accounting Revenues: Gross Charges Allowances Net Revenue Other operating revenue TOTAL REVENUE Expenses: Salaries Benefits Office Supplies Medical Supplies Operating Contracts Insurance Other expenses Depreciation TOTAL EXPENSES INCOME FROM OPERATIONS 4

5 Financial Statement P&L Operating Revenue: Gross Revenue Unit of Service x Standard Charge Rate No regard for the $ s that will be collected or written off Net Revenue Gross Revenue less: contractual allowances, self-pay allowances, denials, charity care and bad debt expense Reflects the anticipated net collection for services 5

6 Financial Statement P&L Operating Revenue (cont d): Capitation payment arrangement for health care service providers such as physicians or nurse practitioners pays a physician or group of physicians a set amount for each enrolled person assigned to them, per period of time Patient Ledger Data 6

7 Financial Statement P&L Other Revenue Not tied to core daily operations Examples include: Rent revenue Tuition from nursing schools Interest Income Cafeteria Income Donation Revenues 7

8 Financial Accounting Revenues: Gross Charges Allowances Net Revenue Other operating revenue TOTAL REVENUE Expenses: Salaries Benefits Office Supplies Medical Supplies Operating Contracts Insurance Other expenses Depreciation TOTAL EXPENSES INCOME FROM OPERATIONS 8

9 Financial Statements Operating Expenses Labor & Fringe Benefits Salaries and Wages FICA Health, pension, etc. benefits Supplies Medical Supplies: Stents, Pacemakers, ortho screws, bandages, etc. Office supplies: forms, pens, etc. 9

10 Financial Statements Operating Expenses (cont d) Operating Contracts Equipment rentals Maintenance contracts Facilities Utilities: Electric, Water, etc. Grounds: Snow removal, Maintenance: on-going maintenance (noncapital) Insurance: malpractice, etc. 10

11 Financial Statements Operating Expenses (cont d) Insurance Business insurance, malpractice, etc. Other Expense Payments for 3 rd party services, marketing, cleaning services, etc. Depreciation Monthly expense of recognizing the cost of capitalized purchases. Spreads the expense over the useful life of the capital asset (i.e. building, equipment, etc.) 11

12 Financial Accounting Revenues: Gross Charges Allowances Net Revenue Other operating revenue TOTAL REVENUE Expenses: Salaries Benefits Office Supplies Medical Supplies Operating Contracts Insurance Other expenses Depreciation TOTAL EXPENSES INCOME FROM OPERATIONS 12

13 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 13

14 Balance Sheet Assets= Liabilities + Equity ASEETS LIABILITIES AND EQUITY Current Assets Current Liabilities -Cash - Accounts Payable - Marketable Securities - Notes Payable - Accounts Receivable - Accruals - Inventories (supplies, products) Assets Limited as to Use (Fixed Assets) Long-term Liabilities - Plant - Bonds - Equipment Total Liabilities Intangible Assets Equity (Net Worth or Fund Balance) - Accumulated Depreciation - Paid-in Capital (grants, contributions) - Retained Earnings Total Assets = Total Liabilities and Equity 14

15 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. 15

16 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) 16

17 Ratio Analysis 4 Different Categories: Liquidity Operating Debt Profit

18 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 18

19 Operating Analysis Total Asset Turnover Fixed Asset Turnover 19

20 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 20

21 Profit Analysis Operating Margin Return of Assets Profit Margin 21

22 Common Managed Care Rations Medical Claims Expense Ratio = Total Medical Claims Expense Premium Revenue Administrative Expense Ratio = Non-health Service Expense Total Operating Expense 22

23 Managerial Accounting Decisions that require cost information: Pricing (short/long range) Capital Investment Discontinuance/sales values Performance Evaluation 23

24 Managerial Accounting Two ways to classify costs: Relationship to sub-unit being analyzed Relationship to the volume (amount) of services provided. 24

25 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 25

26 Managerial Accounting Fixed Costs allocated to departments for 1. Cost Allocations 2. Cost Process 26

27 Managerial Accounting Cost Allocations vary based on: 1. Allocation Method 2. Allocation base 3. Responsibility Center 4. Depreciation Method. 27

28 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. 28

29 Managerial Accounting Direct Costs Indirect Costs 29

30 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. 30

31 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. 31

32 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. 32

33 Financial Management Understanding the impact of the Economic Decision: 1. Opportunity Costs 2. Incremental Costs 3. Sunk Costs 33

34 Capital Investment Two Key Decision makers: 1. Source of Capital 2. Use of Capital 34

35 Capital Investment 2 sources of capital: A. Equity - Contributed Capital - Retained Earnings B. Debt - Short-term Debt - Long-term Debt 35

36 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 36

37 Evaluation Techniques Economic Evaluation Technique - Net Present Value (NPV) Accounting Evaluation Techniques Accounting Rate of Return = Average Annual Cash Flow Total Cash Flow 37

38 Capital Budgeting Types of capital expenditures: Land Land Improvements Buildings Fixed equipment Major moveable equipment Major repairs 38

39 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. 39

40 Capital Budget Process 1. Budget committee identifies and prioritizes all capital requets. 2. Department managers project and budget committee confirms cash flows for each capital request. 3. Budget committee or CFO performs financial analysis on all the requests. 4. Department manager requesting the capital expenditure identifies non-financial benefits for the request. (ie. Community need or Medical staff policies). 5. Budget committee evaluates the financial and non-financial benefit for each request and makes decisions. 40

41 Evaluating Capital Budgeting Performance Long-term debt-to-net assets = Long Term Debt Net Assets 41

42 References Managerial Accounting Managerial Accounting: An Introduction to Concepts, Methods, and Uses by Maher, Stickney & Weil, 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 42

43 References Financial Management The Financial Management of Hospitals and Healthcare Organizations, Fourth Edition, Capital Budgeting pp by Michael Nowicki, EdD, FACHE, FHFMA 43