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Running head: FINANCIAL STATEMENT ANALYSIS 1 Financial Statement Analysis Jane M. Schmaltz University of Mary June 3, 2017

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Page 1: Financial Statement Analysis viewfinancial statement analysis2. financial statement analysis10. running head: financial statement analysis1

Running head: FINANCIAL STATEMENT ANALYSIS 1

Financial Statement Analysis

Jane M. Schmaltz

University of Mary

June 3, 2017

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FINANCIAL STATEMENT ANALYSIS 2

Financial Statement Analysis

Without the use of an organizational budgets and constant financial analysis, an

organization may have difficulty sustaining a business with longevity in mind. The primary

foundation of utilizing a budget is to help aid the organization in forecasting profitability, as well

as the ability to monitor the performance and outcomes of financial success. Budgets provide

necessary data needed to make difficult decisions on behalf of the organization. The knowledge

gained through financial statistics can assist with changes or challenges being faced, in order to

ensure profitability and growth of a corporation.

The analysis of financial statements can be usefulness when trying to convey an

understanding of the financial well-being of the organization. Financial statements provide

information that is detrimental for success; which includes the financial position of the

organization, along with the income, assets, and cash flow that give an indication of the

company’s status. Financial statements help to paint a picture of the organizations viability and

stability that provide insight to the direction the organization needs to go. Proper understanding

and interpretation of these financial documents will help guide the organization on a sustainable

path to success.

There is often a misconception that when a company utilizes a chief financial officer, the

financial situation of the organization is exclusively their responsibility. In today’s society,

where healthcare is constantly changing, the responsibility of the financial system must include

all leadership positions with buy-in from all associates. Nursing leadership and administration

must be involved in understanding the financial status of the organization in order to assist in

sound financial decisions. The financial standing of an organization has become a

multidisciplinary movement, where nursing leadership has taken on a significant role. The

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information contained in “these reports can help nurse managers and executives know whether

the organization has sufficient resources to provide larger raises, add staff, or agree to capital

expenditure requests or whether the organization will need to substantially cut expenses just to

avoid going out of business” (Finkler, Jones, & Kovner, 2013). The complete understanding of

budgeting concepts and analysis of financial statements should be a focusing factor of all nursing

leaders to be able to guide their employees to make financially responsible decisions that are

both safe for the patients and fiscally astute.

Financial Statement Description

There are four financial statements that construct an organizations budget. The four

statements include the “statement of financial position (or balance sheet), the statement of

operations (or income statement), statement of changes in net assets (or changes in equity), and

the statement of cash flows” (Finkler et al., 2013, p. 97). Without the utilization and

interpretation of all four statements, there would only be a partial view or understanding of the

true financial situation.

Statement of Financial Position

The statement of financial position or often times called the balance sheet, represents the

organizations’ assets, liabilities, and equity. Essentially, “the balance sheet represents the

resources available within the entity” (Quick MBA, 2010). The balance sheet represents the

fundamental equation of accounting which consists of assets = liabilities + owners’ equity

(Finkler et al., 2013). In other words, the assets must equal the combination of the owners’ equity

in the company with their total liabilities; hence the “balance” sheet. Assets can be considered

anything in the institution that is owned by the organization, physical or intangible items, such as

reputation and recognition for higher standards. The company’s liabilities are represented by

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FINANCIAL STATEMENT ANALYSIS 4

monies that are owed to others outside the organization, such as accounts payable, compensation,

and benefits. Leaving the owners’ equity to signify the portion of the organizations assets that

extends to the owners.

Statement of Operations

The statement of operations, otherwise known as the income statement, captures the

comparison of the revenues and expense of the organization. Revenues are described as “monies

that the organization is legally entitled to collect in exchange for the services that have been

provided” (Finkler et al., 2013, p. 98). Revenues are typically listed as the expected collections

from patient care activity (inpatient, outpatient, long-term care, home-care, physicians),

donations, and other operating revenues. The expenses generally include the salaries and wages,

professional fees, purchased services, medical claims, supplies, leases, depreciation and

amortization, along with interest. Essentially the statement of operations displays the profits and

losses being faced at a specific given time throughout the organization.

Statement of Changes in Net Assets

The statement of changes in net assets or in equity identifies the reasons for the changes

in the entity’s value (Heffernan, 2013). Changes in assets or equity help to identify where the

changes lie between the current and prior year for the net assets. The main reason for presenting

the statement of changes in net assets or equity is that many items that affect the net asset or

equity balances my not be fully described when analyzing the statement of operations; this is

simply an easy way to show the changes being made from year to year.

Statement of Cash Flow

The financial report which identifies as the statement of cash flow, ultimately shows the

flow of cash into and out of the organization. “This provides a substantially improved sense of

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what things the organization will have sufficient cash to undertake” (Finkler et al., 2013, p. 110).

This financial report summarizes sources and uses for the organizations cash, as well as

indicating whether or not there is enough cash to continue normal operations within the facility.

Financial Analysis

Organizational Details

My organization is a 300 bed, not-for-profit, full service, level II trauma center serving

residents from North Dakota, South Dakota, and Eastern Montana; with the extension and

ownership of several hospitals and clinics among several different cities throughout North

Dakota and into South Dakota. Built in the late 1800’s, this organization has built a strong faith

based organization that recently underwent a merger with a larger corporation. Due to the

financial hardships faced in this constantly changing industry, the organization made the decision

to make some drastic changes to point the company in the right direction. The primary changes

have been the implementation of alternate cost effective suppliers and contract compliance

through the supply chain, which reduce expenses to the patient and to the organization; a change

in our billing process with the addition of an outsourced process in order to completely capture

the appropriate revenue; the addition of the latest innovative technology represented by the da

Vinci XI Robot, which opened opportunities to increase our revenue and surgical volumes

through the addition of state-of-the-art robotic surgery; and the largest changes being a drastic

reduction in our non-productive workforce, which would reduce the expenses paid out through

wages, salaries, and benefits. These changes have altered the financial statements over the last

two years to show financial progress within our focus areas of reducing expenses and increasing

revenue.

Description of Statement Findings

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There were two reports from my organization that I focused on for my learning and

understanding of financial statements for this assignment; the balance sheet and the statement of

operations. Beginning with the statement of financial position or balance sheet, my

organizations’ statement delineates the information to be able to utilize it in comparison by fiscal

year to date actual month (for the period ending April 2017), fiscal year to date previous month

(for the period ending March 2017), and end of fiscal year June 2016. Listed under assets, the

balance sheet shows all current assets, investments and assets limited as to use, property and

equipment, and investments in unconsolidated organizations, and other (which is understood to

be miscellaneous items). The liabilities presented on this statement record the current liabilities,

which consists of compensation and benefits, third-party/Medicare/Medicaid liabilities, accounts

payable, accrued expenses, variable rate debt with liquidity, and short term debt; long term debt,

which includes pension liabilities, and long term capital obligation debt from the merger. The

equity or net assets are itemized out as controlling, non-controlling, unrestricted, temporarily

restricted, and permanently restricted. Together the document shows total assets equaling the

exact amount of total liabilities and equity.

The second report from my organization that I focused on for my learning and

understanding of financial statements for this assignment was the statement of operations. This

report was laid out to represent a picture of the fiscal year 2017 for the period ending in March

2017. The statement shows the values for comparison listed under monthly and year to date, both

showing actual, budget, prior year at that month, dollar variance, and percentage variance. My

organizations’ statement of operations is categorized into six groups, which consist of revenues,

expenses, income or loss from operations before restructuring impairment, income or loss from

operations, non-operating gains or losses, and excess or deficits of revenues over expenses. The

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revenues are itemized by net patient services, net patient services revenues before provision for

doubtful accounts or bad debt, and non-patient revenues such as donations and changes in equity

of unconsolidated organizations. The expenses are broken down by salaries and wages, employee

benefits, medical professional fees, purchased services, consulting, supplies, utilities, insurance,

rentals and leases, interest and depreciation with amortization. The income or loss from

operations before restructuring impairments include all severance or retirement packages offered

to employees to eliminate the facilities non-productive worked hours in order to lower expenses.

The income or loss from operations, non-operating gains or losses, and the excess or deficit of

revenues over expenses were stand-alone amounts without further descriptions. The report being

delineated by month and year to date allows easy analysis of monthly progress in comparison to

the year to date figures.

Interpretation of Financial Reports

Interpretation of financial reports helps an individual understand the organizations

financial position, financial strengths and financial weaknesses. Upon analyzing these two

financial statements, I was able to see the progress this organization has made in its attempt to

reduce the expenses as manifested through the organizational restructuring which shows a

reduction in expenses of salaries and wages by 13.7%; as well as a reduction in the supply

expenses exhibited by a 10.1%. I was also able to identify a drastic change in captured revenue

from the previous year to the current monthly fiscal year standings by showing a positive turn

from a deficit of 24.6% to a deficit of 4.3%. Although this remains a financial weakness due to

the ongoing deficits, there is an indication of the company moving in the right direction by

showing improvement in total revenues captured compared to the previous year. This can also be

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attributed to the changes in our billing process with the addition of an outsourced process in

order to completely capture the appropriate revenue that was being overlooked in previous years.

When analyzing these statements, I can recognize that the organization is overcoming the

past financial circumstances with strengths in reducing expenses and increasing revenue.

Although the organization is over budget for expenses year to date, the monthly data shows the

organization as being under budget by 9%; which would lead me to believe that with each month

gradually climbing, the company may reach or exceed the budgeted goals. This places the

position of the organization in a fairly stable situation with the continued improvements.

Analysis of the balance sheet shows the organizations’ assets equaling the total liabilities

and net assets or equity; which when comparing the data to the previous year has remained fairly

steady and unchanged in regards to amounts. As a beginner in financial interpretation, the assets,

liabilities and equity are far greater in actual dollar amounts than I had anticipated. The major

weakness that I observed from this report is the diminished number of liquid assets presented to

show the company’s stability. Liquid assets can be converted quickly to cash to pay the liabilities

of the organization; however, the organization does not clearly show enough liquid assets in the

event the company gets into trouble financially. Having a sufficient number of liquid assets

makes a company look “safer” on the paper financial statement, this organization does not

supply that adequately. In my opinion, this may be due to the fact that the organization just

completed a merger with a larger organization, as well as attempting to clean up the financial

deficits in order to become profitable in the future.

Financial ratios can help place these data sets into perspective by analyzing the data in a

comparison view. “The purpose of financial ratios is to assist you with information in decision-

making in your practice” (Bucci, 2014). For example, when focusing on excess or deficit of

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revenue over expenses, the organization is showing more expenses than revenues, which puts the

organization in a bad financial position. However, there is a trend (although still remaining a

deficit), showing the organization is improving within this ratio with every passing month. When

comparing the cash-to-debt ratio the comparison for this organization shows a deficit of cash to

debt for the month, although there is a trend showing a steady incline in the cash-to-debt ratio

throughout the fiscal year. When comparing the bad debt as a percentage of net patient services

revenues (the lower the percentage the better), the organization shows a decrease in percentage

from the previous year to this year; again showing the company is moving towards success.

Productivity ratios are a hot topic within the organization to promote reduction of non-productive

worked hours. The total employee compensation and benefits as a percentage of net patient

services revenues are declining due to the facility-wide restructuring and reduction of the

workforce. The difference in percentages from last year to this year show successful progress in

reducing the percentage, ending below the desired fifty percent. The ratios and trends are

showing progress in the organizations financial situation, again showing the financial situation

improving by deficits steadily declining and the sense of profitability on the horizon.

Organizational Financial Mentor

The individual I met with to discuss the financial statements and my analysis of the

organizations financial situation, was the chief financial officer or CFO. “Chief financial officers

are individuals in charge of the financial functions of the organization; including financial

functions related to sources, investment of the organization’s financial resources, generation of

accounting information for making external reports, and the generation of accounting

information for use by administration” (Finkler et al., 2013, p. 58). When meeting with the CFO,

I was able to strengthen my interpretations with further understanding of his in-depth

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descriptions of the concepts that link finances together. The accuracy of my interpretations were

truthful, yet very broad in a sense of comparison. The CFO was able to show me different ratios

and statistics that he focused on that were very helpful in pulling my knowledge and

understanding together to show more depth to my initial interpretations. My experience

throughout this meeting was completely insightful and encouraging. The CFO encouraged

participation and understanding of the hospitals financial situation; even inviting me back to

review the budget with him again next month. He was very open to teaching about the

importance of nurse leaders to know and understand the ins and outs of the financial structure.

Reflecting back on this experience, I think what I learned the most is the comprehensive

involvement of the entire organization in order to facilitate and implement financial changes.

With the restructuring and reduction in the non-productive workforce, it was very eye opening

for me to be able to see the differences in the expenses of salaries and wages simply by reducing

non-productive worked hours. The restructuring and refocusing in order to become financially

sound makes more sense when you can see the figures on paper. When you can see the

difference these difficult decisions make from a financial standpoint, it helps you want to be part

of the solution.

Conclusion

Organizational budgets and constant financial analysis of an organization are necessary to

plan and implement changes that help sustain a business into the future. The four financial

statements involved in an organizations budget will help provide the adequate information

nursing leaders and executives need in order to support and understand the financial status of the

organization. The experience gained through this financial analysis will continue to help me

build upon my financial knowledge and responsibility to the organization. When leadership

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throughout the organization understand the financial situation of the organization, they become

more understanding and aware of the day-to-day functions that effect the bottom line. Nursing

managers can help facilitate decisions even on the department level to help the overall financial

status of the organization. Application of the knowledge gained from these financial statements

will help facilitate the organizations financial goals from the bottom up, as the future of an

organization depends on financial success.

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References

Bucci, R. V. (2014). Medicine and business: A practitioner’s guide.

http://dx.doi.org/10.1007/978-3-319-04060-8

Finkler, S. A., Jones, C. B., & Kovner, C. T. (2013). Accounting Principles. In Financial

management for nurse managers and executives (pp. 96-107). St. Louis, MO: Elsevier.

Heffernan, J. (2013). Healthcare Finance 101. Paper presented at the Massachusetts General

Hospital Physician Association, Boston, MA. Retrieved from

http://www.massmed.org/Continuing-Education-and-Events/Conference-Proceeding-

Archive/Finance-101-for-Physicians-and-Practice-Administrators-Webinar-Presentation-

(pdf)/

Quick MBA. (2010). Accounting: 4 financial statements. Retrieved from

http://www.quickmba.com/accounting/fin/statements/