Financial Ratios and Health Care Organizations
Financial Ratios and Health Care Organizations
Monique Thomas
MHA 612 Financial and Managerial Accounting
Instructor Stacy Hiles
September 10, 2012
Financial Ratios and Healthcare Organizations Health systems routinely compare their financial results to those of a peer group of healthy competitors. Although managers of most organizations strive to achieve the outcomes of comparable healthy competitors, it is equally important to examine those of unhealthy competitors. By doing so, managers can learn from their mistakes and know what to avoid in the future. All C-level managers (chief executive officers, chief financial officers, and chief operating officers) should ask the following questions on a quarterly basis: Are we financially on track with similar healthy companies, or are we headed for failure like some insolvent companies? Are certain ratios more sensitive and predictive of financial failure than traditional ratios used to describe healthy health systems? What type of indicators (cash based or accrual based) serves as early warning indicators of any financial solvency problems (Coyne, Singh & Smith, 2008)? Snook and Sudell (1975) state a publication of industry standards for financial ratios has provided hospital financial management with insight into the universal situation. Comparison of the individual hospital’s financial ratios with those of the industry presents the financial manager with a quick and helpful tool. Another helpful type of comparison that can be made with financial ratio-analysis is comparing current ratios with past, and even expected future, ratios. This allows the hospital to gauge the institution’s financial viability and determine deterioration or improvement. The versatility of ratio analysis is practically limitless. Prudent use of financial ratio-analysis allows hospitals not only to understand the financial condition of their institution more fully but also to predict trends and problems, both
Monique Thomas
MHA 612 Financial and Managerial Accounting
Instructor Stacy Hiles
September 10, 2012
Financial Ratios and Healthcare Organizations Health systems routinely compare their financial results to those of a peer group of healthy competitors. Although managers of most organizations strive to achieve the outcomes of comparable healthy competitors, it is equally important to examine those of unhealthy competitors. By doing so, managers can learn from their mistakes and know what to avoid in the future. All C-level managers (chief executive officers, chief financial officers, and chief operating officers) should ask the following questions on a quarterly basis: Are we financially on track with similar healthy companies, or are we headed for failure like some insolvent companies? Are certain ratios more sensitive and predictive of financial failure than traditional ratios used to describe healthy health systems? What type of indicators (cash based or accrual based) serves as early warning indicators of any financial solvency problems (Coyne, Singh & Smith, 2008)? Snook and Sudell (1975) state a publication of industry standards for financial ratios has provided hospital financial management with insight into the universal situation. Comparison of the individual hospital’s financial ratios with those of the industry presents the financial manager with a quick and helpful tool. Another helpful type of comparison that can be made with financial ratio-analysis is comparing current ratios with past, and even expected future, ratios. This allows the hospital to gauge the institution’s financial viability and determine deterioration or improvement. The versatility of ratio analysis is practically limitless. Prudent use of financial ratio-analysis allows hospitals not only to understand the financial condition of their institution more fully but also to predict trends and problems, both
References: American College of Healthcare Executives. (2009, March 27). Fundamentals of Healthcare Finance. Retrieved from http://www.ache.org/pubs/hap_companion/gapenski%20fhf/FHFOLAPPB.pdf Cleverley, W. O. 2002. "Who is Responsible for Business Failures?" Healthcare Financial Management 56 (10): 46-52. Clouse, M. L. (1992). Balancing growth, financial policies, and board objectives: A sustainable growth model for health care organizations. Topics in Health Care Financing, 19(1), 46-46. Retrieved from http://search.proquest.com/docview/235174214?accountid=32521 Coyne, J. S., DrP.H., Singh, S. G., & Smith, Gary J,PhD., F.A.C.H.E. (2008). The early indicators of financial failure: A study of bankrupt and solvent health systems. Journal of Healthcare Management, 53(5), 333-45; discussion 345-6. Retrieved from http://search.proquest.com/docview/206730248?accountid=32521 Snook, D. J., & SUDELL, W. B. (1975). Financial ratio-analysis - a quick simple test. Hospital Financial Management, 29(6), 16-16. Retrieved from http://search.proquest.com/docview/196376468?accountid=32521