mmichaelsportfolio.files.wordpress.com€¦ · web viewfinancial statements are essential tools for...
TRANSCRIPT
FINANCIAL STATEMENT ANALYSIS 1
Financial Statement Analysis
Marla K. Michaels
University of Mary
FINANCIAL STATEMENT ANALYSIS 2
Financial Statement Analysis
Introduction
Formalized budget planning provides an effective quantified guide for the management
of revenues and expenses, representing management’s expectations and intentions, which helps
to ensure the use of best methods for the maintenance of fiscal responsibility and health within
an organization (Anderson & Danna, 2013; Finkler, Jones, & Kovner, 2013). Good budgets are
simple, balanced, flexible, and purposed with the intent to utilize available resources in effort to
prevent increasing expenses (Anderson & Danna, 2013). In their conjunctive relationship to
achieve cost center and organizational objectives, budgets force managers to establish goals and
plan ahead, which improves the outcomes of the operations and services an organization
provides and can be appreciated by evaluating fiscal reports (Finkler et al., 2013).
Financial statements are essential tools for managers to effectively manage their unit’s
resources and are typically provided both monthly and for an entire fiscal year. Looking over a
single financial statement shows raw data in which a handful of numbers appear important, but
examination of multiple financial statements is necessary to extrapolate the critical data needed
for a true indication of strengths and weaknesses, and increase or decline of the financial
situation (Finkler et al., 2013). Internal accountants keep track of financial data throughout the
fiscal year and external accountants are contracted to examine or audit the records as an
oversight measure to ensure the generally accepted accounting principles (GAAP) are followed
and the information is presented for public review in a fair, accurate and understandable report
(Finkler et al., 2013). These financial reports are important to a number of interested outside
parties, including but not limited to, the government, creditors, potential investors, donors,
FINANCIAL STATEMENT ANALYSIS 3
shareholders, and stakeholders (Finkler et al., 2013).
In health care organizations (HCOs) centered around hospitals, nurse leaders are
responsible for and control the largest part of the labor budget; therefore, nurse managers must
have functional knowledge of the objectives of budgeting, basic accounting concepts, and
understanding the finances of their organization (Douglas, 2010; Finkler et al, 2013). In the
interest of the fiscal health and the continual overall betterment of the organization, nurse
managers need to be able to competently communicate and collaborate with financial managers.
As health care policies become more complicated and demanding and HCOs are asked to do
more with less resources, the quality and effectiveness of the relationships between nurse
leaders, finance managers and executives can be the difference between an organization’s fiscal
stability or financial turmoil (Douglas, 2010).
Key Financial Statements
There are four key financial statements that are normally prepared for use by external
interested parties; the statement of financial position (or sometimes referred to as the balance
sheet), the operating statement (commonly called the income statement), the statement of
changes (also called the changes in equity statement), and the statement of cash flows (Finkler et
al., 2013). These statements summarize the financial activities of an organization and can be
prepared at any point of time and applied to any span of time (Libby, Libby, & Short, 2009). It is
important to note that the main goal of any organization, for-profit or not-for-profit is to make
money; however, in a for-profit business, the net profit belongs to the owners and stockholders
and in a not-for-profit organization, the net earnings are used to fulfill the mission by acquiring
new and expensive technologies, expand operations, for costs of repair and replacement of
FINANCIAL STATEMENT ANALYSIS 4
facilities, and a savings account for unexpected emergencies (Finkler et al., 2013).
Statement of financial position
A balance sheet is the most essential of all the reports because it indicates the financial
position of an organization at a specific point in time by fundamentally summarizing what is
owned and what is owed (Finkler et al., 2013). Liabilities are presented on the right side of the
statement and assets and or equity are shown on the left. The assets minus the liabilities equal the
owner’s assets or liabilities plus owner’s equity equals the assets in a for-profit organization, and
in a not-for-profit organization, assets minus liabilities equals the net assets of the community
since there are no owners (Finkler et al., 2013). For either type of organization, for-profit or not-
for-profit, both sides of the equation must always be equal or balanced.
Operating statement
The statement of operations, as it is called in health care industries, is the primary
performance measure of a business; a report that shows revenues less expenses during a specified
accounting period to reveal net income or profit, or a loss (Libby et al., 2009). Revenues are
reported here whether or not the goods or services have been paid for yet and expenses are
calculated similarly in that they may be paid out during the specified period, but some may carry
over to another report period (Libby et al., 2009). Therefore, net income does not usually equal
the net cash generated by operations (Libby et al., 2013).
Statement of changes
This statement reports how the distribution of dividends and net income affected the for-
profit organization’s financial position during a specified period of time (Libby et al., 2009). The
FINANCIAL STATEMENT ANALYSIS 5
balance of retained earnings increases as net income is earned during the year, or decreases with
a loss, which displays the relationship of the operating statement to the balance sheet (Libby et
al., 2009). Issuance of stock increases owner’s equity and the payment of dividends to the
stockholders results in a decrease in retained earnings (Finkler et al., 2013; Libby et al., 2009).
For a not-for-profit organization, this statement exhibits the changes in equity by reconciling the
net assets or owner’s equity from the end of the previous year through the completion of the
current year (Finkler et al., 2013). The reader of this statement is provided with the changes
within the unrestricted, temporarily restricted, and permanently restricted classes of net assets.
Statement of cash flows
A cash flow statement provides data about how much and where cash comes from and
goes out (Finkler et al., 2013). There are three cash flow categories in this statement and each
can either be positive or negative, cash flows from: operating expenses, investing activities, and
financing activities (Finkler et al., 2013; Libby et al., 2009). A prediction of future cash flow can
be found here, which is quite useful for knowing what funds may be available for payment of
dividends to investors (for-profit organizations), debt to creditors or projects an organization
might like to take on (Libby et al., 2009). This statement is commonly used on a monthly and
yearly basis in most organizations (Finkler et al., 2013).
Analysis
The financials made available and interpreted in this section belong to a pediatric sub-
specialty ambulatory clinic in the Midwest United States. The clinic is part of a large division
within a not-for-profit organization that features a specialty hospital and numerous sub-specialty
clinics, as well as research and academic programs that employs a workforce of over 6,500
FINANCIAL STATEMENT ANALYSIS 6
people. One unique factor for consideration is that there is a highly specialized procedure
performed within the clinic that is not a part of any other clinic of this particular specialty
anywhere else in the United States. Other unique factors are that the clinic employs a nurse
dedicated to performing specialty outpatient infusions and lab draws, and most of the staff,
including the infusion nurse, perform duties for other sections of the division that are not
included in the financials presented.
I was able to obtain two statements, the income statement and the productivity report for
August 2014. When I requested the statements, September was not available. A unit on the
income statement represents one patient visit and the unit totals equal department volume. There
are two categories for units, inpatient and outpatient. Since the department or cost center is an
ambulatory outpatient clinic, there were only two inpatient units provided for patients during
their stay in the hospital (the highly specialized procedures), and 517 units provided for all types
of the outpatient services (physician visits, nurse visits, infusions, etc.) available for a total of
519 units. The total unit budget for the month of August was 364, which is the normal monthly
budget average over the course of the year. This information shows a favorable variance of 155
units for the cost center in August 2014. The budgeted revenue per patient for August 2014 was
$505.58, which would total $183,955 for the expected 364 units; however, the actual per patient
revenue was $518.97 over 519 units, which equaled $256,523, exceeding the total patient
revenue budget by $85,389.
The operating expenses budget for the month was set at $62,046 with a per unit budget of
$170.63. The actual operating expenses were $77,225, but the actual per unit expense was
$148.80, revealing a more efficient month for the actual revenue to expenses ratio. The operating
expenses budget overage of $15,180 is attributed to variances in staffing ($9421), medical
FINANCIAL STATEMENT ANALYSIS 7
supplies ($6,964) and drugs ($1,180). Although the clinic did manage to spend less than the
budgeted allowance in other areas; other supplies ($1,142), other expenses ($1,072), depreciation
($122), and purchased services ($50).
For the productivity report, one FTE (full time equivalent) is equal to an employee
working 40 hours per week. In August 2014, there were actually 12.13 total FTEs or 2148 hours
paid although the budget was set at 10.84 FTEs or 1921 hours. The total actual productive
worked hours were 1853 or 10.46 FTEs (budget 9.38), with and additional 1.66 FTEs paid in
non-productive (paid time off) hours (budget 1.36). An interesting finding was that there was no
overtime hours recorded during this volume heavy month even though there was 0.1 budgeted.
The actual paid FTEs by skill mix showed 0.97 for the nurse manager, 8.88 for RNs, 1.67 for
technical allied health and .61 for administrative assistants.
August is our busiest month of the year and also a time when nurses and care assistants
take vacations before their children go back to school. Most of the physicians take their summer
vacations earlier in the year, which seems to make August a catch up time for them. Our
physicians are also very accommodating for families’ needs and will add extra on appointments
onto their schedules so that patients can be seen before the busy school year begins. With that
being said, August unit volumes are not normal, they are much higher, which provides a
significant boost for the annual total patient revenue.
Assessing the data and interpreting the results using the income statement and
productivity report revealed some interesting perspectives. The most intriguing finding was that
the reported an industry benchmark for hours worked per unit as 2.72, but our clinic was 3.57 in
our most efficient month of the year, which is significantly more, so that is not good, right?
FINANCIAL STATEMENT ANALYSIS 8
However, the budget for hours worked per unit was set even higher at 4.62. Likewise, the paid
hour per unit benchmark is stated as 3.11, our actual was 4.14; however the budget was 5.28. I
believe there are a few explanations for this data. One being that the highly specialized procedure
that our department provides and many of the infusion procedures use significantly more nursing
time, which lends to the unfavorable difference in the paid hours per unit against the industry
benchmark. Another thought is that nurse only visits are counted as a unit but do not bring in
near as much revenue as a physician visit unit, which is unfavorable for revenue per unit;
however, it still increases the revenue per hours worked ratio. Another thought is that because of
our institution’s ardent dedication to staff (at all levels) collaboration on the multitude of
research and education programs, and more importantly, the impassioned commitment to
providing the highest quality health care possible, the administration recognizes and accounts for
a significant variance in what is benchmark or average for the industry because it will simply not
suffice for the extraordinary efforts and outcomes demanded by the administration of our
institution. For this month, the expense per unit was quite favorable. The budget was set at
$170.53, but the actual expenses were $148.80, which also led to a favorable actual salary per
unit of $131.98, when the budget was $160.44. The supply expenses for the month was not
favorable at $23.47 per unit since the budget was set at $15.26, but the significant increase in
infusions and the specialized procedures and the supplies needed to complete them from the
normal unit volume is an intelligible rationale for this overage.
The fact that there were no overtime hours during such a busy month is quite intriguing. I
believe there are a few reasons for this. There is only a total of four FTEs in our cost center and
all other staff is less than one, with six 0.8 FTEs and two 0.6 FTEs, which reduces the likelihood
and occurrence of staff working over 40 per week. That is not to say that some staff members did
FINANCIAL STATEMENT ANALYSIS 9
not work more than their FTE status and therefore contributed to the budget overage for salaries
and wages, because that did happen, but it was the staff who are not a whole FTE and they did
not go over 40 hours within a work week. Another reason for the lack of overtime hours is that
when staff take vacation days, they have a choice to use their hours worked over during a week
to cut down on the amount of paid time off (PTO) they have to use to bring them up to their FTE
status. The staff members working less than one whole FTE can do this over a 2 week period, as
long as they do not go over 40 hours in one designated consecutive 7 day period; that would
legally have to be paid as overtime in accordance with labor laws (Mathis, Jackson, & Valentine,
2014). A final contributing factor for the lack of overtime hours is that our department
encourages staff to flex their hours as appropriate to cut down on hours worked over their FTE
status. I believe this is a valuable tool for administration to use in effort to keep staff in the clinic
during their individually busiest and most productive times and allow for them to come in late or
leave early when they are able to.
U.S. News & World Report has ranked our division in the top ten for our sub-specialty
category for several years, which is higher than any of the other sub-specialties in our institution.
August 2014 proved to be especially profitable with the noted increase in unit volume, even with
overages in drug, medical supplies and especially salaries and wages. I believe that our
institution’s administration finds the value in our work to be exceptional, as supported by U.S.
News & World Report, and it is in our best interest to continue our efforts as long as we endeavor
to keep our cost center’s revenue balanced with, or in excess of the expenses.
The individual I met with to obtain and review the financial and productivity statements
is my Nurse Manager. Interestingly, she is a graduate of the University of Mary dual MSN/MBA
degree program. After reading my analysis of the statements, her comments were “Its fabulous,
FINANCIAL STATEMENT ANALYSIS 10
nice work,” (A. E. Nau, personal communication, October 29, 2014) and that my “analysis of the
figures was spot on”. She also provided some rewording of a one of my interpretations so that it
would be clearer for the reader. I also met with my neighbor (and best friend) who was an
external CPA for Arthur Anderson for several years before becoming an internal accountant for
the last 22 years at a large organization with headquarters in our area. She assisted me with
identifying and describing the statements as I began analyzing the statements. T. A. Keyes
(personal communication, October 25, 2014) stated that she was not familiar with health care
organizations specifically because the CPAs at Arthur Anderson each had their specialties;
however, she stated they are still just an income and productivity statement and the data is
relatively the same.
Conclusive Summary
In the ever-increasing complex world of health care, nurse mangers need to be
knowledgeable of financial and budgetary principles; able to interpret the data provided in
financials; and proficient at tying the relationships of the information from multiple statements
and interpreting information they reveal when combined. Much like a nursing care plan, a budget
is a tool to guide activity (Anderson & Danna, 2013). Developing and using a budget is a must
for effectively managing costs, quality, and efficiency in any business, but as the Patient
Protection and Affordable Care Act continues to unfold, these skills will become increasingly
critical for the health care industry, particularly nurse managers.
FINANCIAL STATEMENT ANALYSIS 11
References
Anderson, B. & Danna D. (2013). Budgeting principles for nurse managers. In L. Roussell,
(Ed.), Management and leadership for nurse administrators (pp. 435-477). Burlington,
MA: Jones & Bartlett Learning.
Douglas, K. (2010). Taking action to close the nursing-finance gap: Learning from
success. Nursing Economic$, 28(4) 270-272. Retrieved from
http://www.nursingeconomics.net/necfiles/staffingUnleashed/su_JA10.pdf
Finkler, S.A., Jones, C. B., & Kovner, C. T. (2013) Financial management for nurse managers
and executives. (4th Ed.). St. Louis, Missouri: Saunders.
Libby, R., Libby, P. & Short, D. (2009). Financial accounting. [DX Reader version].
Retrieved from
http://highered.mheducation.com/sites/0073324833/student_view0/ebook/chapter1/
chbody1/the_four_basic_financial_statements__an_overview.html
Mathis, M. L., Jackson, J. H. & Valentine, S. R. (2014). Human resource management. (14th ed.)
Stamford, Connecticut: Cengage Learning.
FINANCIAL STATEMENT ANALYSIS 12
Appendix A
FINANCIAL STATEMENT ANALYSIS 13
Appendix (con’t.)
FINANCIAL STATEMENT ANALYSIS 14
Appendix (con’t.)