Healthcare Support Organization Presentation

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Develop a financial analysis of a healthcare support organization of your choosing(e.g., medical device manufacturer, pharmaceutical company, medical supply company). The intent of this assignment is to evaluate the financial and operational health of the organization and disseminate the information to the class. You may pursue, analyze, and synthesize any information source you choose (e.g., website content, personal interviews, organizational documentation). Strive to be rigorous and thorough in your research.

Note: For-profit organizations are generally easier to research than not-for-profits as all financials are reportable to the Securities and Exchange Commission.

Final Paper Instructions

Upload your completed financial analysis of your chosen healthcare support organization. The intent of this assignment is to evaluate the financial and operational health of the organization and disseminate the information to the class.

  • Projects are not limited in size, should be professional in appearance, and cover (at a minimum) the evaluation of the metrics discussed in Gapenski and Pink (2015), which are detailed in Chapter 13 in the sections about Ratio Analysis, DuPont Analysis, and Operating Indicator Analysis.
  • You may pursue, analyze, and synthesize any information source you choose (e.g., website content, personal interviews, organizational documentation). Strive to be rigorous and thorough in your research.
  • Your final presentation should report on the business’ location(s), competitive market(s), service lines, and business segments, for example. Unless otherwise indicated, a five-year trend analysis—including the most recent year of available information/data—is expected.
  • Do not just report the data—tell me what it means. Ultimately, would you invest in the company? Why or why not?
  • Presentations should adhere to Advisory Board formatting. See the Strategic Plan Template below for an example.

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HCM301 Module 8 Portfolio Project Strategic Planning Template Introductory Statement: The introductory statement should briefly describe why the strategic plan was developed and for what time period and identify the author of the plan. Background Statement: This section may provide information about the organization, such as history, management structure, and supporting partners or agencies. Alternatively, you could use this section as a brief business statement — more of an elevator pitch — to concisely describe the organization. Organizational Structure: Include this information if it’s relevant to evaluate how your business or organization operates and is structured, from governing board to staffing. Vision: A vision statement should briefly describe what a company wants to achieve or become. This is one of the primary organizational tenets to consider, along with values and mission. Values: These are the principles that an organization stands for and abides by. Many organizations create core value statements to guide company culture. Mission Statement: A mission statement describes the purpose of the organization. This is distinct from a vision statement because it is not a projected goal for the future. Problem Statement: Some plans include a problem statement, which can outline key or discrete issues that need to be addressed. Environmental Scan: An analysis of the and legal factors that impact the organization. Include a stakeholder analysis. political, economic, social and technological SWOT Analysis: A SWOT analysis provides a foundation and context for developing strategy by examining the strengths and weaknesses within and organization as well as external opportunities and threats. Goals: Objectives should be measurable and broken down into actionable steps, and the action plan for each goal should specify who is responsible for implementing the strategy, a timeline for starting and ending the action, and how the outcome will be evaluated. Evaluation: Methods for evaluation should be spelled out in the strategic plan. This could include tracking key performance indicators (KPIs) and documenting the progress of action steps on an ongoing basis. Executive Summary: This final summary helps employees, investors, or other readers quickly understand your plan. CHAPTER 13 Financial Condition Analysis Now, our focus changes from capital acquisition and allocation decisions to financial condition analysis. Of all the knowledge needed to effectively manage a healthcare organization, perhaps the most important is understanding the business’s current financial condition. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Overview • One of the most important characteristics of a business is its financial condition. • Financial condition analysis answers this question: Does the organization have the financial capacity to accomplish its mission? • Results often focus on the business’s financial strengths and weaknesses. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Overview (Cont.) • Several techniques are used: – Financial statement analysis focuses on the information in a business’s financial statements with the goal of assessing financial condition. – Operating indicator analysis focuses on operating data with the goal of explaining financial performance. – Economic value added analysis focuses on assessing managerial performance. • We will use Riverside Memorial Hospital to illustrate these analyses. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Income Statements (000s) 2014 2013 Revenues: Patient service revenue Less: Provision for bad debts Net patient service revenue Premium revenue Other revenue Total operating revenues Expenses: Nursing services Dietary services General services Administrative services Employee health and welfare Malpractice insurance Depreciation Interest expense Total expenses Operating income Nonoperating income Net income $106,502 3,328 $103,174 5,232 3,644 $ 112,050 $ 95,398 3,469 $ 91,929 4,622 6,014 $102,565 $ 58,285 5,424 13,198 11,427 10,250 1,320 4,130 1,542 $105,576 $ 6,474 2,098 $ 8,572 $ 56,752 4,718 11,655 11,585 10,705 1,204 4,025 1,521 $102,165 $ 400 1,995 $ 2,395 Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Balance Sheets (000s) 2014 2013 Cash and equivalents Short-term investments Net patient accounts receivable Inventories Total current assets Gross property and equipment Accumulated depreciation Net property and equipment Total assets $ 2,263 4,000 21,840 3,177 $ 31,280 $145,158 25,160 $119,998 $151,278 $ Accounts payable Accrued expenses Notes payable Total current liabilities Long-term debt Capital lease obligations Total long-term liabilities Net assets (equity) Total liabilities and net assets $ $ 4,707 5,650 2,975 $ 13,332 $ 28,750 1,832 $ 30,582 $107,364 $151,278 Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. 3,095 2,000 20,738 2,982 $ 28,815 $140,865 21,030 $119,835 $148,650 5,145 5,421 6,237 $ 16,803 $ 30,900 2,155 $ 33,055 $ 98,792 $148,650 2014 Statement of CFs (000s) Cash flows from operating activities: Operating income Adjustments: Depreciation Increase in accounts receivable Increase in inventories Decrease in accounts payable Increase in accrued expenses Net cash flow from operations Cash flows from investing activities: Investment in property and equipment Investment in short-term securities Net cash flow from investing Cash flows from financing activities: Nonoperating income Repayment of long-term debt Repayment of notes payable Capital lease principal repayment Net cash flow from financing Net increase (decrease) in cash and equivalents Beginning cash and equivalents Ending cash and equivalents $6,474 4,130 (1,102) (195) (438) 229 $9,098 (4,293) (2,000) ($6,293) $2,098 (2,150) (3,262) (323) ($3,637) ($ 832) 3,095 $2,263 Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Statement of Cash Flows Analysis • Operations provided $9.098 million in net cash flow in 2014. • Riverside invested $6.293 million in new fixed assets and short-term securities. • Riverside paid off $5.735 million in debt and capital leases and received $2.098 million in nonoperating income. • When all flows are considered, the hospital’s cash account decreased by $832,000. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Ratio Analysis • Ratio analysis is a technique used in both financial statement and operating indicator analyses. • It combines values from the financial statements (and elsewhere) to create single numbers that: – Have easily interpretable economic significance. – Facilitate comparisons. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Financial Ratio Analysis Categories • Profitability: Is the business generating sufficient profits? • Liquidity: Can the business meet its cash obligations as they become due? • Debt management: Does the business use the right mix of debt and equity? • Asset management: Does the business have the right amount of assets for the volume of services it provides? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Interpreting Ratios • A single ratio value has little meaning. For example, a total margin of 7.0%. • Therefore, two techniques are used to help interpret “the numbers”: – Trend (time-series) analysis – Comparative (cross-sectional) analysis • Both techniques will be illustrated in the examples to follow. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Profitability Ratios (2014) Total margin = Oper. margin Net income Total revenues* $8,572 = = 0.075 = 7.5% $114,148 = Operating income Total operating revenues = $6,474 = 0.058 = 5.8% $112,050 *Total revenues = Total operating revenues + Nonoperating income = $112,050 + $2,098 = $114,148. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. ROE = = Net income Total equity $8,572 = 0.080 = 8.0% $107,364 TM OM ROA* ROE 2014 2013 7.5% 5.8% 5.7% 8.0% Ind. 2.3% 0.4% 1.6% 2.4% 5.0% 3.5% 4.8% 8.4% *ROA = Net income / Total assets = $8,572 / $151,278 = 0.057 = 5.7%.  What is your interpretation? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Liquidity Ratios (2014) CA $31,280 CR = CL = $13,332 = 2.3 times Cash and equiv. + ST investments DCOH = Cash expenses* / 365 $2,263 + $4,000 = = 22.5 days $277.93** *Cash expenses = Total exp. – Depreciation = $105,576 – $4,130 = 101,446. **Cash expenses / 365 = $101,446 / 365 = $277.93. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. 2014 2013 Ind. CR 2.3x 1.7x 2.0x DCOH 22.5 18.9 30.6  What is your interpretation? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Self Check Considered alone, which of the following would increase a company’s current ratio? a. An increase in net fixed assets. b. An increase in accrued liabilities. c. An increase in notes payable. d. An increase in accounts receivable. e. An increase in accounts payable. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Debt Management Ratios (2014) Total debt Debt ratio = Total assets $43,814 = = 0.290 = 29.0% $151,278 EBIT TIE ratio = Interest expense $10,114 = = 6.6 times $1,542 Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. 2014 2013 Ind. DR 29.0% 33.5% 43.3% TIE 6.6x 2.6x 4.0x  What is your interpretation? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Asset Management Ratios (2014) Total revenue FA turnover = Net fixed assets $114,148 = = 0.98 times $119,998 Total revenue TA turnover = Total assets $114,148 = = 0.75 times $151,278 Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Net patient accounts rec. DPAR = Net patient service rev. / 365 $21,840 = = 77.3 days $103,174 / 365 FATO TATO DPAR 2014 0.98 0.75 77.3 2013 0.87 0.70 82.3 Ind. 2.2 0.97 64.0  What is your interpretation? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Du Pont Analysis • Du Pont analysis summarizes and highlights a business’s financial condition. • It is based on the fact that ROE can be expressed as the product of three ratios: – Total margin (expense control) – Total asset turnover (asset utilization) – Equity multiplier (debt utilization) Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Total x TA Equity x = ROE margin turnover multiplier NI Rev x Rev TA x TA TE = ROE 2013: 2.3% x 0.70 x 1.5 = 2.4% 2014: 7.3% x 0.75 x 1.4 = 8.0% Ind: 5.0% x 0.97 x 1.7 = 8.4%  What does it all mean? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Self Check A firm’s ROE is above the industry average, but its total margin and equity multiplier are both below the industry average. Which of the following statements is most CORRECT? a. b. c. d. e. Its total assets turnover must be below the industry average. Its return on assets must equal the industry average. Its total assets turnover must equal the industry average. Its TIE ratio must be below the industry average. Its total assets turnover must be above the industry average. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Operating Indicator Analysis • Operating indicator analysis involves the use of operating data (as opposed to financial statement data) to try to explain a business’s financial condition. • If managers understand the underlying operating conditions, they can better deal with financial problem areas. • Here, we will present only two examples. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Net Price Per Discharge (2014) Net inpatient revenue NPPD = Total discharges $87,740,000 = = $4,800 18,281 Industry average = $5,056  How is this value interpreted? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Occupancy Percentage (Rate) (2014) Inpatient days OR = Number of staffed beds x 365 95,061 = = 0.579 = 57.9% 450 x 365 Industry average = 44.9%  How is this value interpreted? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Limitations of Financial Statement and Operating Indicator Analyses • Comparison with industry averages is difficult if the business operates many different divisions. • “Average” performance is not necessarily good performance. • Sometimes, it is hard to tell if a ratio is “good” or “bad.” Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Limitations (Cont.) • Distortions can easily occur: – Different accounting conventions – Seasonal factors – Inflation – Window dressing • It is often difficult to tell whether a business is, on balance, in a strong or weak position: – Multiple discriminant analysis – Financial flexibility index Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Economic Value Added (EVA) EVA = = Dollar cost of Dollar return to investors capital employed NOPAT - Dollar capital costs = (EBIT x [1 - T]) - (Capital employed x CCC). NOPAT = Net operating profit after taxes. CCC = Corporate cost of capital. Capital employed = Equity + Interest bearing debt. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. EVA (Cont.) • EVA takes into account the total dollar cost of capital, which includes the cost of equity. • EVA is not a cash flow measure. It attempts to measure the true economic benefits and costs of an entire business, division, or project. • In practice, relatively complex adjustments must be applied to accounting data to obtain EVA. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. EVA Example (000s) Here is Riverside’s 2014 EVA: NOPAT = ($8,572 + $1,542) x (1 - 0.0) = $10,114 Dollar capital costs* = $140,921 x 0.07 = $9,864 EVA = $10,114 - $9,864 = $250 *$2,975 + $30,582 + $107,364 = $140,921. CCC = 7%.  How is this EVA interpreted?  Does ROE give similar information? Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. What Can Be Done to Improve EVA? EVA = [EBIT x (1 – T)] – (Capital employed x CCC). ◼ Improve earnings ⚫ Increase revenues • Increase sales volume • Increase prices Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. What Can Be Done? (Cont.) EVA = [EBIT x (1 – T)] – (Capital employed x CCC). ◼ Improve earnings ⚫ Reduce operating expenses • • • • Examine labor productivity Review wage and benefit rates Examine supplies and licensing costs Review overhead costs Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. What Can Be Done? (Cont.) EVA = [EBIT x (1 – T)] – (Capital employed x CCC). ◼ Reduce taxes (if applicable) ⚫ Examine tax deprecation policy ⚫ Review inventory accounting policy ⚫ Acquire businesses with accumulated tax losses Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. What Can Be Done? (Cont.) EVA = [EBIT x (1 – T)] – (Capital employed x CCC). ◼ Reduce the capital employed ⚫ Reduce current assets • Inventories • Receivables ⚫ Reduce fixed assets • Evaluate needs Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. What Can Be Done? (Cont.) EVA = [EBIT x (1 – T)] – (Capital employed x CCC). ◼ Reduce the cost of capital ⚫ Business risk • Reduce operating risk • Reduce operating leverage Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. What Can Be Done? (Cont.) EVA = [EBIT x (1 – T)] – (Capital employed x CCC). ◼ Reduce the cost of capital ⚫ Financial risk • Optimize financing mix • Optimize debt maturity structure Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. EVA Summary • The economic value added (EVA) model is useful both is assessing managerial performance and in providing insights into how to improve financial performance. • In essence, it tells managers to – Increase operating income by maximizing revenues while minimizing expenses. – Hold the very minimum amount of current and fixed assets necessary to produce the operating income in a efficient prudent manner. – Ensure that the business and financial risk is optimal for the enterprise. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Self Check A new CEO wants to strengthen the hospital’s financial position. Which of the following actions would make it financially stronger? While holding patient revenue constant, increase: a. b. c. d. e. Earnings before interest and taxes. Accounts receivable. Accounts payable. Notes payable. Inventories. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Benchmarking The process of comparing a business’s performance data to selected standards is called benchmarking. Here are Riverside’s total margin benchmarks: 2014 2013 National/GFB 9.8% National/GFB 9.6% Ind. top quartile 8.4 Ind. top quartile 8.0 St. Anthony's 8.0 St. Anthony’s 7.9 Riverside 7.5 Pennant Healthcare 5.0 Industry median 5.0 Industry median 4.7 Pennant Healthcare 4.8 Riverside 2.3 Ind. lower quartile 1.8 Ind. lower quartile 2.1 Woodbridge Memorial 0.5 Woodbridge Memorial (1.3) Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Key Performance Indicators and Dashboards • KPIs are a limited number of financial (and nonfinancial) metrics that measure performance critical to the success of an organization. • Dashboards present an organization’s KPIs, often as gauges which allow managers to quickly interpret the indicators. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Three Key Learning Points • Financial statement analysis is the primary method used to assess a business’s financial condition. • Financial statement analysis has some serious problems, including development of comparative data, interpretation of results, and inflation effects. • Key performance indicators and dashboards are used to focus on measures that are most important to the fulfillment of an organization’s mission. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. CHAPTER 13 EXTENSION This chapter extension focuses on market value ratios, common size analysis, and percentage change analysis. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Market Value Ratios Price per share Price / Earnings Ratio = Earnings per share Price per share Market / Book Ratio = Book value per share Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Common Size Analysis In common size analysis, all income statement items and balance sheet accounts are expressed as percentages of revenue or total assets, which facilitates comparisons when there are scale differences. Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. 2014 Common Size Balance Sheet (000s) Riverside Industry Cash and equivalents Short-term investments Net patient accounts receivable Inventories Total current assets Gross property and equipment Accumulated depreciation Net property and equipment Total assets 1.5% 2.6 14.4 2.1 20.6% 96.0% 16.6 79.4% 100.0% 3.7% 2.0 17.2 2.5 25.4% 90.1% 15.5 74.6% 100.0% Accounts payable Accrued expenses Notes payable Total current liabilities Long-term debt Capital lease obligations Total long-term liabilities Net assets (equity) Total liabilities and net assets 3.1% 3.7 2.0 8.8% 19.0% 1.2 20.2% 71.0% 100.0% 3.9% 4.1 3.2 13.3% 36.5% 0.9 37.4% 49.3% 100.0% Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Percentage Change Analysis In percentage change analysis, year-to-year changes in income statement items and balance sheet accounts are expressed as percentage changes, which helps identify items that are “out of control.” Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. 2014 Percentage Change Income Statement (000s) Riverside Industry Revenues: Patient service revenue Less: Provision for bad debts Net patient service revenue Premium revenue Other revenue Total operating revenues Expenses: Nursing services Dietary services General services Administrative services Employee health and welfare Malpractice insurance Depreciation Interest expense Total expenses Operating income Nonoperating income Net income 11.6% (4.1) 12.2% 13.2 (39.4) 9.2% 2.7% 15.0 13.2 (1.4) (4.2) 9.6 2.6 1.4 3.3% 1,518.5% 5.2 258.0% Copyright © 2015 Foundation of the American College of Healthcare Executives. Not for sale. Industry data not available
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