ESSENTIALS IN FINANCIAL MANAGEMENT

FOR HOSPITAL EXECUTIVES

Executive Course in Hospital Administration

Organized by the College of Public HealthUniversity of the Philippines

Presented by:

Manuel Eduardo B. Lunas

I. Introduction to Financial Management

a. Overview

b. Looking at a Corporation’s Finances

c. Analysis of Financial Status

II. Fundamental Concepts

a. Risks and Rates of Return

b. Time Value

III. Financial Assets

a. Bonds

b. Stocks

c. Accounts Receivable Capital Budgeting : Investing in Long-Term Assets

a. Cost of Capital

b. Basics of Capital Budgeting Capital Structure / Dividend Policy

a. Equity vs Leverage

b. Dividend Declaration

vi. Working Capital

a. Managing Current Assets

b. Financing Current Assts

vii. Financial Planning and Forecasting

simply is the science of the handling of money

Financial Management

-involves the planning, directing, monitoring, organizing and controlling of the monetary resources of an organization

Survive Avoid Distress and Bankruptcy Beat the Competition Maximize Sales or Market Share Minimize Costs Increase Profits Maintain Steady Earnings Growth

Classifiable into Two Groups

•Profitability•Risk Control

Type of Organization

Private Company Private / GovernmentProfit Oriented Non Profit

Objective Profit Service ProvisionFinancial Viability Financial Viability (?)Shareholders Satisfaction

Stakeholders Investors / Shareholders General PublicDefined Sector

Other Sources

Traditional BureaucraticResponsibility centers (Profit or cost center)

Organizational Structure

Borrowings Subsidies

By service lines or major grouping•(Cardio Vascular- Section•Radiology Department-•Diagnostics Center

•Loans•Bond float•Leasing•Public offering

•Loans•Grants•Industrial partnership

Joint venture agreements common for both

Financial Management is Centered on a strategic vision

-what we want to happen

-what we need to be

Defined as:

-a scenario

-a set of targets -basically a model

The essence of financial management focuses on the transformation of the current situation to a desired paradigm shift

Planning establishing goals and developing strategies for these goals --Budget preparation is the major activity in this element

Controlling

involves assuring that the established plans or strategies are being followed -- monitoring of operation results vs target

Organizing and Directing relates to using resources to the best

advantage. Resources: In this case may also apply to staff, space, supply and equipment

Decision Makingthe analysis and evaluation of critical issues to select the best alternatives for action

Balance Sheet Revenue & Expense Statement

Changes in Fund Balance/Net Worth

Cash Flows

Balance Sheetis the declaration of the organizational assets and liabilities

Revenue and Expense Statement-covers a time period (i.e. a year and shows the summary of revenues generated vs. expenses incurred

Changes in Fund Balance/Net Worth-reflects whether an organizations is moving in a positive direction via its value appreciation or in a negative way through its decline in value

Cash Flows -this translates a variety of accounting elements where cash has yet to be received along with depreciation of appropriate assets and converts them in a cash flow for a designated period.

Note: The first two are often considered the most critical in determining an entity’s over-all well being. As a normal operating expectation, revenue must exceed expenses to attain financial viability

Risk and Rate of Return Time Value of Money Parameters

Type of Organization

Private Company Private / GovernmentProfit Oriented Non Profit

Objective Profit Service ProvisionFinancial Viability Financial Viability (?)Shareholders Satisfaction

Stakeholders Investors / Shareholders General PublicDefined Sector

Other Sources

Traditional BureaucraticResponsibility centers (Profit or cost center)

Organizational Structure

Borrowings Joint Venture Agreement

By service lines or major grouping•(Cardio Vascular-Radiology Department- Diagnostics Center)•Subsidiary section

•Loans•Bond float•Leasing•Public offering

•Loans•Grants•Industrial partnership

Joint venture agreements common for both

-the process by which capital expenditures are decided using various criteria for project selection

Tools for Capital Budgeting• Net Present Value• Internal Rate of Return• Profitability Index• Payback Period• Return on Book Value

A capital expenditure normally requires a huge cash outlay for a project that is supposed to produce a cash inflow over a period of time exceeding one year. E.g. acquisition of a new CT-Scan machine, setting up a Medical Arts bldg, Land acquisition

Goal of every firm is to maximize present shareholder value. This implies that projects to be undertaken should result in a positive net present value, that is the present value of the expected cash inflows less the present value of the needed capital expenditures.

There is a wide array of criteria for selecting projects. Some stakeholders want projects with immediate surges in cash flow while others emphasize on long term growth with little short term performance. This difficulty arises in satisfying different interests of stakeholders.

-takes the form of a loan or other borrowings (debt) proceeds of which are invested or used with the intent of earning a higher return than the cost of interest on the borrowing.

If the firm’s ROA is higher than the rate of interest on the loan then ROE will be higher that if it did not borrow. But if the ROA is lower than the cost of borrowing then the ROE will be lower. Borrowing is not recommended

A corporation without borrowings is an all equity firm whereas a leverage firm is one with a mix of ownership equity and debt. The higher the debt means the firm is more leveraged. The extent of leveraging can show the potential positive returns a company may attain and the optimum levels that must be maintained to assure positive financial viability. Over leveraging in turn can cause the reverse.

Components of Working Capital

•Cash•Marketable Securities•Inventory•A/R’s

Inventory and receivables are financed by trade suppliers

(Just In Time Concept)

It decreases working capital requirements and increases profits as working capital has costs

(-) Negative Working Capital Cash is already received even prior to actual sales

delivery and more so prior to payment to supplier

•Credit card transactions e.g. Amazon (books), Dell (cellphone) Globe (prepaid cards)•HMO’s

Working Capital Policy

Types of short-term debt•Short-term bank loans•trade credits•Commercial paper (iou’s)•Accrued liabilities

Advantages•Speed•flexibility

Disadvantages•High costs•Short-term dependability

Short-Term Loans•Bank Loans•Commercial Paper•Trade Credit•Revolving Credit Line•A/R Financing

--Sale / Factoring / Discounting of A/R’s

Long-Term Loans / Borrowing

•Mortgage Loans - on Real Assets•Chattel Mortgage•Leasing --operating lease --financial lease•Bond floatation

High A/R levels Mounting Promissory Notes Cash Flows (Erratic behavior) Pressures on A/P’s Need for CAPEX Huge debt Burden Decreasing Profit Margins

Opportunity Areas• Savings• Efficiencies• Corporate Social Responsibility• Ecological Support

Thank you for your time and participation!