1. FACHE BOG Exam Study Group FINANCE Presented by: Edward McKillip, FACHE Director of Finance, Main Line Health

2. Agenda Financial Accounting Managerial Accounting Financial Management 2

3. Financial Accounting Financial Statement A. Revenue B. Expenses 3

4. Financial Statement Revenue: Gross Revenue Net Revenue Capitation Patient Ledger Data Non-Operating Revenue 4

5. Financial Statements Expenses: 5 Labor & Fringe Benefits Net Revenue Supplies Equipment Facilities

6. Financial Accounting Cont. Non-Operating Transactions Cash Flow Statements & Balance Sheets –Sale/purchase of assets – Incurrence/retirement of Debt –Sale of equity in a for-profit company 6

7. Balance Sheet Assets= Liabilities + Equity 7

8. Sample Financial Statement 8

9. Cash Flow Statements Convert Net Income from accrual based accounting to Cash by adding non-cash expenses back to Net Income. Identifies Cash Flows from providing services, investing and financing activities. Is your organization generating enough income to meet both your short-term and long-term needs. 9

10. Sample Cash Flow Statement 10

11. Ratio Analysis 4 Different Categories: Liquidity Operating Debt Profit

12. Liquidity Ratios Current Ratio = total current assets total current liabilities Acid Test Ratio = cash, marketable securities and Net A/R total current liabilities Collection Period = net accounts receivable average daily operating revenue Days Cash on Hand = cash, marketable securities (operating expenses-depreciation expense)/365 12

13. Operating Analysis Total Asset Turnover Fixed Asset Turnover 13

14. Debt Analysis Long-term debt to fixed asset = long-term debt fixed assets owned Long-term debt to equity = long-term debt equity Debt Service Coverage = (rev-exp) + interest exp + deprec exp Interest expense + principal payments 14

15. Profit Analysis Operating Margin Return of Assets Profit Margin 15

16. Common Managed Care Rations Medical Claims Expense Ratio = Total Medical Claims Expense Premium Revenue Administrative Expense Ratio = Non-health Service Expense Total Operating Expense 16

17. Managerial Accounting Decisions that require cost information: Pricing (short/long range) Capital Investment Discontinuance/sales values Performance Evaluation 17

18. Managerial Accounting Two ways to classify costs: Relationship to sub-unit being analyzed Relationship to the volume (amount) of services provided. 18

19. Managerial Accounting Total Cost = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Per Unit = TFC + TVC Volume Volume Breakeven Point = TFC CM = Contribution Margin Quantity Equation = TFC + Margin CM Rate Setting Equation = TFC + TVC + Margin CM Contribution Margin = Revenue per Unit – VC per Unit = Price – VC per Unit 19

20. Managerial Accounting Fixed Costs allocated to departments for 1.Cost Allocations 2.Cost Process 20

21. Managerial Accounting Cost Allocations vary based on: 1. Allocation Method 2.Allocation base 3.Responsibility Center 4.Depreciation Method. 21

22. Managerial Accounting Cost Process requires: 1.Definition of Cost Centers 2.Determine Direct Costs of support service centers. 3.Allocate support cost to service cost centers to determine total costs. 4.Determine unit cost by dividing total center costs by number of unites provided. 22

23. Managerial Accounting Direct Costs Indirect Costs 23

24. Indirect Costs Several Key Responsible Centers: 1. Cost Centers – Input only measuresd. 2. Revenue Center – Output only measured. 3. Profit Center – Input and Outputs measured. 4. Investment Center – Inputs and Outputs measured in relation to amount of investment. 24

25. Financial Management Capital requirements of the organization are - Costs of doing business. - Costs of staying in business. - Costs of changing business. - Returns of supplies of capital. 25

26. Financial Management The Accounting and Economic Costs are Accounting costs are outputs of the accounting system. Accounting break-even occurs when revenues = expenses. Economic costs reflect current market value. Economic break-even includes a return to all suppliers of capital and requires that total financial requirements be met. 26

27. Financial Management Understanding the impact of the Economic Decision: 1. Opportunity Costs 2. Incremental Costs 3. Sunk Costs 27

28. Capital Investment Two Key Decision makers: 1. Source of Capital 2. Use of Capital 28

29. Capital Investment 2 sources of capital: A. Equity - Contributed Capital - Retained Earnings B. Debt - Short-term Debt - Long-term Debt 29

30. Capital Investment Inputs to determine the rate of return on the capital investment: Cash Flow Economic Life Discount Rate Impact of taxation and/or cost-based reimbursement 30

31. Evaluation Techniques Economic Evaluation Technique - Net Present Value (NPV) Accounting Evaluation Techniques Accounting Rate of Return = Average Annual Cash Flow Total Cash Flow 31

32. Capital Budgeting Types of capital expenditures: Land Land Improvements Buildings Fixed equipment Major moveable equipment Major repairs 32

33. Types of capital expenditure budgets: Replacement - examples To replace equipment at the end of useful life. To improve productivity. To improve quality or because it is required by regulation. New – examples Expanded service. Improve safety conditions. Reduce operating expenses. Improve patient care. 33

34. Capital Budget Process 1.Budget committee identifies and prioritizes all capital requets. 2.Department managers project and budget committee confirms cash flows for each capital request. 3.Budget committee or CFO performs financial analysis on all the requests. 4.Department manager requesting the capital expenditure identifies non-financial benefits for the request. (ie. Community need or Medical staff policies). 5.Budget committee evaluates the financial and non-financial benefit for each request and makes decisions. 34

35. Evaluating Capital Budgeting Performance Long-term debt-to-net assets = Long Term Debt Net Assets 35

36. References Managerial Accounting Managerial Accounting: An Introduction to Concepts, Methods, and Uses by Maher, Stickney & Weil, 1997. Orlando: Harcourt Brace & Company The Financial Management of Hospitals and Healthcare Organizations by Michael Norwicki, 1999, Chicago: Health Administration Press Fundamentals of Financial Management, by Eugene Brigham, 1995, Orlando: Harcourt Brace & Company 36

37. References Financial Management The Financial Management of Hospitals and Healthcare Organizations, Fourth Edition, “Capital Budgeting” pp. 187-198 by Michael Nowicki, EdD, FACHE, FHFMA 37