Riverview Community Hospital Financial Statement - Term Paper Example

? Riverview Community Hospital Financial ment Analysis Riverview Community Hospital Financial ment Analysis Riverview Community Hospital has been known to be the provider of top-notch health care services to its growing service area. The hospital received an astounding full accreditation by the Joint Commission. This was indeed giving credit where it is due since Riverview Community Hospital prides itself in providing high safety and superior health care to the public. Riverview Community Hospital’s financial statements will give an overview of the financial status of the hospital currently, and for the recent past years. This will enable a critical look or an analysis of the hospital’s performance in matters financial. From the analysis, informed and helpful decisions result in improving the state of the hospital and enhance its capacity of providing excellent services to the public (Peterson & Fabozzi, 2006). The financial analysis of Riverview Community Hospital will be based on its three key financial statements: the statements of operations, the balance sheets, the statements of cash flow. Selected industry data will also show the hospital’s financial standing. A number of sample ratios outline the hospital’s financial conditions. The financial ratios are derived using the hospital’s financial data from the financial statements. These ratios are combined in a form of an equation, the Du Pont Equation which gives an overview of the financial condition of the hospital (Friedlob & Schleifer, 2003). Financial ratio analysis as a method of establishing an organization’s financial condition has challenges which ought to be tacked so as to maximize on this remarkable tool of acquiring information that is useful in establishing the financial condition of the organization in question. The kind of financial analysis that is being employed is the trend horizontal analysis, also normally referred to as time-series analysis. This is going to give a remarkable determination of how the hospital is likely to perform overtime, using its historical data. This determination is critical for furnishing information that will be of great use in making decisions regarding credit and investment. This analysis will facilitate useful information for assessing future cash flows (Peterson & Fabozzi, 2006). Through the analysis the hospital’s financial strength and weaknesses come to the spotlight. This enables recommendations for effective measures that can be carried out to boost the strengths of the hospital and minimize on its weaknesses so as to ensure high performance of the hospital in offering outstanding health care services. This is so because the financial condition of the hospital is its backbone and if it breaks down, the hospital collapses. Therefore, a sound financial condition is vital for smooth running of the hospital’s activities across all the departments. Cash flow statement analysis The Cash flow worksheet of the hospital will be a vital tool to look at. As the name depicts, the cash flow worksheet depicts the monetary inflows and outflows that the hospital has been able to sustain during the given time period, between the financial year 2006 and 2009. It shows a record of line items in the form the hospitals receipts and disbursements (Friedlob & Schleifer, 2003). The outlined statements of Cash flow is vital in determining whether there is sufficient cash available for the hospital to be able to meet its expenses. The Cash flow statement in short, shows the hospitals financial health. The cash flow statement gives the cash generated by and used in operations in the year 2006 through to 2009. It shows comparatively through this time period, cash flows from investing activities and financing activities. A trend in each category states the monetary cash flows in the hospital. In the year 2008, for instance, the hospitals made the highest investment in asset acquisition (Peterson & Fabozzi, 2006). Riverview’s cash flow statement shows that the hospital in the given period of time has ended each year with reasonable amount of cash in its cash account. In the year 2008, for instance, the net increase in cash was $0.396 million, which was a result of net cash flow operations $4.533million + decrease in LT debt $3.549million – fixed assets acquisition $7.686million = $0.396million (McLean, 2003). The hospital thus experienced a cash inflow of $0.396million during the year, began the year with cash and investments worth $4.673million, hence at the end of the year, Riverview Community Hospital had $0.396million + $4.673million = $5.069 million in its cash account at the end of the year 2008 (McLean, 2003). Perusing across this time period, Riverview’s financial health is sound. It shows that the financial activities of the hospital are intrinsically feasible except for the net decreases in 2007 and 2009 which attributes to hefty investment in fixed assets (Friedlob & Schleifer, 2003). If the statement had showed an operating cash drain, the managers would be concerned since it could lead to financial death of the hospital over time. Close attention needs to be paid to the cash flow statements since cash flows drive the financial condition of the hospital and portray a good picture of every year’s cash flow. The analysis of this statement is resourceful in giving ideas of whether or not the operations of the hospital are sustaining themselves (Peterson & Fabozzi, 2012). The given balance sheet is useful in providing information which leads to development of ratios which are critical in financial analysis of the hospital. The ratios are derived from the content of the balance sheets. The statement of operation gives the revenues and the expenses that the hospital has. A comparison of these will also clarify the hospital’s financial position (Finkler, 2010). The Du Point equation Guide to Financial Analysis The Du Pont equation will help in providing a high-quality outline of the financial condition of Riverview Community Hospital. It shows how the total margin, the ratio of the total asset turn over, and debit interact use in determination of the rate of return on equity. It is a technique of tying the financial ratios together consequently to offer a clear comprehension of the relationships between the various ratios (McLean, 2003). The analysis was developed by the Du Pont Company, hence, named after it. The equation will be arrived through a combination of the basic financial ratios in a manner to give valuable insights to the financial performance of the hospital. It decomposes ROE- returns on equity; this is a vital measure of the hospital’s self-sustainability and perhaps profitability, in to the product of other three ratios which all have interpretations of economic importance (Friedlob & Schleifer, 2003). The resultant Du Point Equation is as below: ROE = Total Margin x Total Asset turnover x Equity Multiplier Net Income = Net income x total revenue x Total Assets Total equity Total revenue total assets total equity To be able to get the overall Du Pont equation that will help in giving an overview of the financial position of the hospital, the financial ratios need to be calculated first, and then applied, so as to be able to obtain the equation (McLean, 2003). Financial ratio analysis The financial ratios will be obtained through the financial ratio analysis of the financial figures of Riverview Community Hospital. The figures will be obtained from the hospital’s balance sheets and statements of operations (Friedlob & Schleifer, 2003). Short, precise and simple descriptions of a sample of the financial ratios to be applied in the equation are as follows: The total margin = net income Total revenues Using the case of the year 2007, the total margin= $2.629million $30.033million =0.08754 =8.75% The industry average is normally 5%. The Total margin of Riverview is 8.75%. This is an astounding performance indicating that the hospital in 2007, made 8.75% on every dollar on each dollar of the total revenues. All factors kept constant, when the total margin is high, the expenses that are relative to revenues are low (McLean, 2003). The hospital’s total margin that is above the normal industry average indicates an expense control which is top-notch, making the hospital to be among the top performers in offering quality services of health care (McLean, 2003). It could also be an indication of relatively high charges, relatively low costs, relatively low allowances, and having non-operating revenues which are relatively high or a combination of these factors. To be able to get the additional specific cause, one can thoroughly do an operating indicator analysis. Return on Asset (ROA) This is expressed as net income divided by total assets; a measure of return on total assets ROA = Net income Total assets = $2.626million $45.738 million = 0.05741 = 5.7% (for the year 2007) Industry average = 4.8 % Riverview has 5.7% ROA. This implies that every asset dollar generated 5.7 cents in profit, which is well beyond the industry 4.8%. This indicates that Riverview was financially productive in using its assets. This ROA tells the ability of the hospital to control expenses through the total margin expression as well as its ability to generate revenue using its assets (Peterson & Fabozzi, 2012). When ROA is high, it implies that the net income for every invested dollar in assets is high, thus, high productivity of assets, and the vice versa is also true. The hospital has, therefore, high productivity in assets due to its ROA% (McLean, 2003). Return on Equity – ROE The net income divided by the total equity Net income Total equity = $2.629million $27.567million = 0.095367 = 9.5% (for the year 2007) The industry average = 8.4 % The ROE of Riverview was way above the industry average of 8.4%. The hospital generated approximately 9.5 cents of income for every dollar of equity investment. This implies that the managers of the hospital are utilizing well the capital that the hospital is supplied with. This is a sign of credibility on utilization of the hospital’s financial capital. It is a plus to the managers of the hospital besides its other praises of health care services of high quality (White et al, 1998). Total asset turnover ratio This will be the measure of turn over or utilization of all the assets of the hospital; total revenues divided by total assets. Total Revenues Total assets = $30.033million $45.78million =0.65 times The industry average = 0.97 This implies that every dollar of total assets generated 65 cents in total revenue. Riverview’s total asset turnover ratio is somewhat below the industry average. The hospital’s utilization of current assets could be better than that of fixed assets (McLean, 2003). The final ratio of the few sampled financial analysis ratios is the current ratio. This is a liquidity ratio. It will help in evaluating whether Riverview will be able to meet its financial responsibilities at the time that it is expected to do so. The current ratio is, therefore, the ratio of current assets to current liabilities. Current ratio = Current assets Current liabilities = $9.772million $2.498million = 3.912 (for the year 2007) Average =2.0 This current ratio shows that should the assets of Riverview be liquefied at book value, it will provide $3.9 for each dollar of current liabilities. The current ratio of Riverview in 2007 was almost double the average. This shows the extent to which the hospital can cover short-term claims by assets that are expected to be converted to cash in the near future. The value of the assets will be as close as possible to their stated values (Peterson & Fabozzi, 2012). The above briefly described financial ratios have shown the various financial conditions of Riverview Community Hospital. The first four combined, bring out the earlier mentioned Du Pont equation quite clearly. The Du Pont equation as mentioned above is denoted as below: ROE = Total Margin x Total Asset turnover x Equity Multiplier Net Income = Net income x total revenue x Total Assets Total equity Total revenue total assets total equity The already defined ratios will be the route to the equation which will give an overview of the hospital’s financial condition. Net Income = Net income x total revenue x Total Assets Total equity Total revenue total assets total equity, $2.629million = $2.629million x $30.033million x $45.738 million $27.567million $30.033million $45.738 million $27.567million 9.5% = 8.75% x 0.65 x 1.67 = 5.69% x 1.67 =9.5% Du Pont equation has the product of the initial two terms at the right side as the ROA. The equation can, hence, be expressed as ROE = ROA x the equity multiplier. In 2007, Riverview had a total margin of 8.75%, showing that the hospital was able to make a profit of 8.75% for each on every revenue dollar. There was a further 0.65 times asset turn over in the year so that the hospital made a return earning of 8.75 % x 0.65 which is 5.69 on its assets. This ROA value when rounded is similar to the value that was calculated earlier. This remarkable equation gives an illustration of the interaction of the total margin measuring the expense control; total asset turnover measuring the utilization of assets, and financial leverage measuring utilization of debt to bring about the determination of ROE (McLean, 2003). The Du Point equation helps in coming up with suggestions of how the financial condition of the hospital can be improved. Riverview can, therefore, cause an influence on the profit margin by reducing costs and increasing revenues (Peterson & Fabozzi, 2012). The achievement of such suggestions is through empowerment of the relevant departments to achieve specific objective such as the cost cutting. Cost reduction methods would fit in the accounting department by reducing the expense through where possible, minimizing of the things which bring these expenses. Volume increment could also see an achievement through procedures such as alteration of charges. Riverview has evidence of the hefty investments on assets, if this could be adjusted accordingly, it will bring a positive effect on the total asset turnover. From the calculated values, Riverview had an ROE of 9.5 % in the sample year of 2007.The industrial average ROE is usually 8.4%. The Du Point analysis shows that Riverview supersedes an average hospital in its service area in terms of asset turn-over and utilization of assets. Riverview’s ROA is also higher than the industry average. This means that compared to an average hospital in the same service area as Riverview, Riverview is getting higher returns on its equity capital (White et al, 1998). Short comings of Du Pont Equation In the case of Riverview which is a non-profit, a chunk part of its net income probably comes from sources that are non-operating as opposed to operations. In the sense that the non-operating revenues vary highly, and cannot be predicted, as they are frequently, ratios and return on equity may not be an ineffective measure of the intrinsic profitability of the hospital (Finkler, 2010). Limitations of financial ratios In as much as financial ratios can give useful information for determination of financial conditions of an organization, they have limitations that require concern and adjudication. Riverview Community Hospital for instance, runs various divisions along different business lines. This makes it challenging to obtain data which is comparative (White et al, 1998). Challenges of inflation can cause alteration of the financial statements. This causes ratio comparison over a given time period to be undependable. Additionally, different practices of accounting can cause distortion of comparisons of financial statements. Accounting practices such as leasing can bring about such distortions, which could reduce the credibility and accuracy of the financial ratios (White et al, 1998). Finally, it is difficult to determine whether a precise ratio is good or bad. For instance, a high ratio of asset turn over may imply the hospital’s efficient use of assets or its undercapitalization hence lack of ability to purchase sufficient assets. Considerable judgment, therefore, ought to be in place when carrying out financial analysis (White et al, 1998). Evaluation and recommendations The financial analysis gives the overview of the financial condition of Riverview hospital. The analysis of data from the hospital’s key financial statements shows the financial standing and the level of financial soundness of the hospital. This financial condition is a sum result of underlying factors of economic and managerial nature. The hospital through these analyses generally shows an outstanding performance in the sample year of 2007. The financial condition of the other years can be achieved by following the same procedures, computation, and interpretation techniques. The financial condition of the hospital is quite superb in the given year; a higher total margin than the industry average. This indicates top-notch expense control in the hospital. The higher ROA percentage than the industrial average shows that the hospital has high asset productivity and the high ROE points to good utilization of the financial capital of the hospital by the managers. This shows that the managers are doing a good job in utilizing Riverview’s financial capital. The hospital’s financial cash flow statements points to intrinsically feasible activities carried out in the year 2006 an 2008. In 2007 an 2009, the hospital experienced a cash flow net decrease which pointed to hefty investment in assets. The other factors such as relative low incomes, relative high charges, having non-operating revenues are issues which would be considered for cross-checking. This is to enable a surety and clarity of the hospital’s impressive total margins to be exclusively coming from excellent expense control practices. This can be done through performing an operating indicator analysis. To give credit where it is due, the management of the financial capital of Riverview by the managers does not go unnoticed. Such commendable practices are highly recommended for such outstanding performances in capital utilization. Riverview could also consider cutting costs by reducing the expenditure figures through probably identifying keenly and reducing on purchasing of assets without tampering with the hospital’s efficiency in health care service provision. References Finkler, S. A. (2010). Financial management for public, health, and not-for-profit organizations. Upper Saddle River, NJ: Prentice Hall/Pearson. Friedlob, G. T., & Schleifer, L. L. F. (2003). Essentials of financial analysis. Hoboken, N.J: John Wiley. McLean, R. A. (2003). Financial management in health care organizations. Clifton Park, NY: Delmar Learning. Peterson, D. P., & Fabozzi, F. J. (2006). Analysis of financial statements. Hoboken, N.J: Wiley. Peterson, D. P., & Fabozzi, F. J. (2012). Analysis of financial statements. Hoboken, N.J: Wiley. White, G. I., Sondhi, A. C., & Fried, D. (1998). The analysis and use of financial statements. New York: Wiley. Read More