financial statement analysis viewfinancial statement analysis2. financial statement analysis10....
TRANSCRIPT
Running head: FINANCIAL STATEMENT ANALYSIS 1
Financial Statement Analysis
Jane M. Schmaltz
University of Mary
June 3, 2017
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
FINANCIAL STATEMENT ANALYSIS 3
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
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
FINANCIAL STATEMENT ANALYSIS 5
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
FINANCIAL STATEMENT ANALYSIS 6
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
FINANCIAL STATEMENT ANALYSIS 7
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
FINANCIAL STATEMENT ANALYSIS 8
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
FINANCIAL STATEMENT ANALYSIS 9
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
FINANCIAL STATEMENT ANALYSIS 10
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
FINANCIAL STATEMENT ANALYSIS 11
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.
FINANCIAL STATEMENT ANALYSIS 12
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/