1. Arcadia Hospital Budget Overview

2. Current Ratio 2005-2006 (in millions)
2005 Assets = 17900
2006 Assets = 18055
2005 Liabilities = 10000
2006 Liabilities = 10100
CR 2005 = .179
CR 2006 = 1.79
Average Two Year Current Ratio = 1.79

3. Inventory Turnover (in millions)
800 for each year, meaning no new inventory was purchased that fit in category or exact amount was purchased to equal total
In both years, inventory accounts for about 4.5% of total

4. Total Assets (in millions)
Differences = <-345 >in cash
Differences = +300 Accounts receivable
Differences = Property Plant & Equipment
Difference = between years

5. Value Calculations for Arcadia
Company appears marginally stable, net decrease in cash of 445
Assets growing, A/R growing, some concern with negative cash
Current liabilities under 20%
LT Liabilities management, although mortgage was not paid down at all between
Net income 8.18% for 2006
National average in net income seems to be trending downward and is just under 6% so Arcadia is a bit over that range
Medical costs are so high that operating margins have declined since 2000 from 13% to -5% on average
Source:

6. Rule of Thumb for Valuation
Typically 1.5 times annual revenue
Arcardia worth then million with following caveats
Wages and benefits are at 52%
Mortgage has not been paid down, need a current assessment
Need to review plan for controlling cashflow
Dr. David Marcinko, “Rules of Thumb Valuation Benchmarks, March 19, 2009 cited in:

7. Adjusted Book Value High-End Value For Arcardia = $600 million
Reduce asking price by: Current Liabilities, adjusted LT liabilities (less mortgage)
Reassess mortgage value to see current market value
Estimated adjusted book value = $542 million
See article on Market value versus book value by John Garger, cited in:

8. Values between '05-'06 Essentially same value Some asset differences
Cash flow worsens in '06
Are receivables out of line or are costs and HMO discounts causing this?
National average is ok – but what strategic direction is necessary?

9. Revenue Variances (in millions)
Net income down 35% or $155 million
Accounts receivable would cover and add additional $145 million to balance sheet
Equipment and bond payments placed '06 in partial jeopardy, which may have been a strategic decision
Question '07 strategic plan

10. Concerns
Typically, as much as 6% of an average hospital's revenue is never recorded due to denials or underpays.
For Arcardia, this would amount to as much as $36 million dollars, which would reduce negative cash flow by almost 11%
See article on revenue loss in:

11. Liquidity and Prospectus
Typical liquidity ratio is 1.5, Arcardia is 1.8
Lower than 1 = negative working capital, higher than 3-4 means poor use of cash
Arcadia is healthy within the industry standards, but needs a cash flow plan for next fiscal years
See Current Ratio and analyzing a balance sheet in:

12. Quick Test or Liquidity Ratio (in millions)
Current assets less inventory = quick assets = for 2006 = 6100
This could theoretically be turned into immediate cash in short-medium turn
Divide by current liabilities = 1.90
Must be greater than 1 or companies cannot pay their liabilities
Arcadia is about average for industry
See the discussion in:

13. Working Capital Issues (in millions)
Working Capital of <-345> divided by total sales of 590 = <-.59>
Thus, Arcardia may have some issues with paying liabilities on time unless cash flow issue can be solved
This ratio tells us that for every dollar of sales, there is now a negative cash flow of about 6%
See discussion on working capital in:

14. Other considerations...
Balance sheet numbers are a key, but not the future value or potential of Arcadia
Numerous issues with the new Obama Administration would factor into an Arcadia plan
No marketing or structural plan was attached, clearly needed
Aging report on A/R and A/P would be helpful as well

15. New Budget Considerations
What is Arcadia's strategy
What is being done to collect A/R
Are costs in line? Department by department line item.
Is there money being unbilled that is recoverable?
What are realistic revenue projections (2006 was over projected by $50 million

16. Wage Considerations For Budget (in millions)
Wages and benefits totaled 350 for 2006, or over 50% of operating costs
Patient revenues were 600
Cost/visit is unknown, but we know that for every dollar Arcadia bills, $.51 goes to salaries
Based on industry standards, this is high
Solution – Benchmarking and adjustment of costs, revisit fee sheets and update billing.
See the discussion on Benchmarking to improve Hospital Financial indicators in:

17. Conclusion
It appears Arcadia is in a growth phase but hitting recessionary issues
Top management needs to be concerned about cash-flow
Strategic marketing necessary – appears that if more patients could be seen using identical resources, this would improve ratios.

18. References
“Analyzing a Balance Sheet,” (n.d.) About.com. Cited in:
“Benchmarking Improves Hospital Financial Indicators,” (May 1, 2000). Healthcare Financial Management. Cited in: assistance/ html
Garger, John. (December 15, 2008). “Market Value Versus Book Value of Liabilities: Financial Distress.” Bright Hub. Cited in:
Marcinko, David E. M.D., (March 19, 2008). “Rules of Thumb Valuation Benchmarks.” Medicat Executive-Post. Cited inhttp://healthcarefinancials.wordpress.com/2008/03/19/rules-of-thumb%E2%80%9D- valuation-benchmarks/:
“Revenue Loss.” (2009). ClaimTrust. Cited in:
Schuhmann, Thomas. (December 2007). “Medicare Margins Trending Downward.” Healthcare Financial Management Association. Cited in: