From the scenario, interpret the operating indicators used to analyze the financial performance of the organization. Indicate specific ways in which this information will help management improve the performance of the organization. Provide support for your rationale.
The operating indicators used to analyze the financial performance of the organization are liquidity, solvency and profitability ratios. According to the textbook, “Ratios are convenient and uniform measures that are widely adopted in health care financial management” (Baker, 2014). The organizations utilize the numbers in an effort to establish a comparative analysis of internal computations versus that of external computations or sources. Liquidity ratios allow the organization to measure assets that can potentially be converted into cash on hand as it relates to the day-to-day operational expenses. Although this indicator is also based on a short-term sufficiency of meeting all current obligations, it determines the organizations levels of financial performance and worth. Solvency ratios involves long-term financial goals of the organization and is effective in measuring its ability to sustain or meet those goals. This indicator accounts for total liabilities and unrestricted fund balances to determine the amount of total liabilities to fund the balance. Profitability ratios are typically used in both nonprofit and for-profit organizations. This indicator involves an assessment of the organizations operating abilities based on operating income over operating expenses. The use of the ratios as operating indicators help improve the performance of the organization through a projected, rational, calculating and efficient method of using numerators and denominators.
Assume that you are a hospital administrator, and one of your responsibilities is selecting financial ratios to be included on your management dashboard. Determine the two (2) most critical financial ratios for you to monitor at your facility, and indicate how each of these ratios would help you assess the current performance of your facility. Provide support for your rationale.
As hospital administrator, I would choose the efficiency and profitability ratios as the two most critical financial ratios used in monitoring my facility. Based on a belief that a strong team is reflective of a strong manager, efficiency ratios would allow a more in-depth analysis of managerial effectiveness as it relates to returns on assets, inventory turnovers, receivable sales and decisions made by management. While profitability ratios would provide a broader, yet detailed overview of areas of weakness in operating income as well as that of revenue. Collectively, the two ratios serve as the foundation of success in monitoring and tracking the organizations needs in terms of financial performance and employee performance as well.
Baker, J. (2014). Health Care Finance: Basic Tools for Non-financial Managers. (4th ed.). Sudbury, MA: Jones & Bartlett
Management can improve performance by looking at the ratio of time in days receivable because they can effect a change to improve the inflow of receivables. Once the hospital manages look at days receivable in days they need to may need to look at ways of decreasing the number of days. One way to accomplish this is to create a team designed specifically to track and report on activities on net receivables. Their goal is to track the bill from the time its submitted for payment to being paid and then reporting on ways to improve the cycle time. By reducing this the hospital could improve their credit rating. When looking to expand using a bond many different considerations have to be taken into account. The return on equity is a key issue for the board because they want to create substantial growth in the long term. Key indicators to being successful will be the general economic market, most import for the hospital is the staff happy and if its union when do they come up for negotiations again. This is one of the hospitals most costly expense and should this go up unexpectedly it could place any new acquisition or construction in jeopardy. Then evaluating the productivity ratios for categories of personal, the payer mix and what possible government changes may be approved or redeveloped. These have to be all considered in the years that the bond will be issued for for example 1-7 years what will be the inflation rate do to cash flow. According to Pointer and Stillman (2004), “the board should focus their on changes in service volumes, market share (overall and by major service lines), cost, labor productivity, and new debt”.
Any person or company that is looking to invest their money has to know what type of business or corporations they are giving their money. The ratio indicators are a quick way to evaluate where they stand from the balance sheet, and income statement. We as investor have a need to know how the company is performing and this will give us relevant information from the current year and previous years. From this information we can determine how they invest their money or if they are hanging on to much cash and not earning enough money for some reason. Looking at a hospital I would be interest in their liquidity status to see how strong they are in being able to pay their bills and for how long. The next thing I would evaluate is the profitability ratios meaning I want to know what the chances are of making money from my investment. The other financial aspect I would want to know is how their solvency ratios stand in relation to their long-term debts. A key aspect when looking a any businesses financial statements is their credit ratings. Top quality corporations are listed AAA and the lower their ability to meet their financial needs the grades diminish (Baker, J. & Baker, R., 2014).
Baker, J., & Baker, R., (2014). Health Care Finance: Basic Tools for Nonfinancial Managers. J Burlington, MA : Burlington, MA
Pointer, D. D., & Stillman D. M. (2004). Essentials of Health Care Organizational Finance : A Primer for Board Members. San Francisco, CA: Jossey-Bass