Required Resources
Media
Video: Investopedia. (n.d.). An introduction to the balance sheet [Online video]. Retrieved April 4, 2011, from http://www.investopedia.com/video/play/introduction-balance-sheet
This video explains how the balance sheet helps health care organizations and even individuals keep track of their net worth.
Readings
Course Text: Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports
Chapter 2, “The Balance Sheet”
The balance sheet presents the financial picture of an enterprise at the moment it is written. It presents the basic equation of accounting showing what you owe (your liabilities) plus the value to owners (the worth) adding up to your assets (what you have). This chapter shows the basic elements of the typical balance sheets. The balance sheet reflects the strength of an organization. It is an X-ray of a hospital’s financial interior. From the balance sheet we find current cash on hand and the current ratios and identify surpluses that can feed into the investment portfolio. Health care organizations may borrow money to buy expensive capital (X-ray machines, hospital buildings, labs), pay employees, and fund organizational growth.
Chapter 3, “The Income Statement”
Income statements report on the making and selling activities of a business over a period of time. In this chapter, you will learn the elements of the income statements. These demonstrate the profitability of a business. Profitability is an indicator of the future of the organization. You have to take in more than you pay out in order to be self sustaining. Even more important is the organization’s ability to grow itself to maintain market share and position within the community. Health care is very dynamic. Improvements are always being made, so new equipment, technologies, and facilities have to be acquired. To do so, the health care organizations must draw upon retained profits.
Chapter 4, “The Cash Flow Statement”
A cash flow statement tracks the movement of cash through a business over a period of time. This chapter addresses the concepts of cash and non-cash transactions, the sources of cash, the way cash is disbursed, and other elements of cash flow. Payments received from clients/patients are almost always after services are rendered, so the challenge is maintaining enough cash on hand to meet your current obligations (payroll, supplies, heat, electricity, etc.) After all, no one would want the electricity or water turned off in the middle of an operation because the hospital didn’t have cash to meet the utility bills this month.
Chapter 13, “Ratio Analysis”
The relationship between the sales, costs, expenses, and assets are important to understanding the financial condition of a business. This chapter explains the ratio analysis useful in analyzing the year-to-year performance of a single company or for comparing several companies within an industry. In health care, third-party payers often provide the funds to pay for health care services. These insurance companies negotiate fees and payment schedules resulting in a complicated environment in which negotiated prices do not necessarily reflect actual costs.
Various expenses are added in to create the cost for a particular health care service or product. For instance, the cost of providing a flu shot is made up of several expenses including the vaccine, labor, insurance, bandage to put over the immunization site, alcohol swab, gloves—and the list goes on. Ideally the price of the shot should include total costs plus a profit. Some negotiated rates may be more or less than the price of the shot thus the provider may make money or lose money for this particular service. If it is a loss then hopefully the organization makes up for it in other ways, such as a pharmacy that offers the shot at a loss but makes up for it in terms of sales of candy bars and aspirin. The ratio analysis to examine the aggregate of all these inputs, as illustrated in the financial statements, provides a one-number indicator that will help us understand our financial position.
Optional Resources
Readings
Article: Doody, D. (2006). The balance sheet: A snapshot of your financial health. hfm (Healthcare Financial Management), 60(5), 124–125.
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