To understand the results from capital analysis, not only from its impact on your department, but from the perspective of the Financial Management team, it is important to understand basic financial data that drives decisions in every healthcare institution.
We will begin with a look at the two most basic financial statements, the balance sheet and income statement. Once you understand how your capital analysis results impact these statements, we will take a more detailed look how the cash flow statement and net present value (NPV) calculations are used. Finally, we will review key financial ratios that help your institution, and outside investors and lenders, measure the overall health of an institution.
Understanding these will help you to see the importance of careful data gathering and making calculated assumptions when using the Kaufman Hall capital analysis model. Some of the financial terms in this section may be new to you. Click underlined items (links) to reference a glossary of terms anytime during this section.
A balance sheet, sometimes referred to as a statement of financial condition, is a snapshot in time. It shows the values in dollars of assets and liabilities as of a given date. The left side of the balance sheet shows the company’s total assets available to generate income or cash, while the right side lists the liabilities or debt, as well as the net assets (also known as the organization’s net worth) as shown below. Assets (left side) should always equal the liabilities and net assets (right side).
ASSETS
Current assets, which are more liquid (consumed within one year), are listed first. Those with the greatest value are:
- Cash and cash equivalents
- Patient accounts receivable
The current assets listed above will be used in key financial indicators to measure cash flow performance for the institution. Key financial indicators will be covered at the end of this section.
Fixed, or long term assets, used over several years include;
- Land
- Buildings
- Equipment, furniture, fixtures
- Long-term investments, etc.
Right after buildings and equipment are acquired, they will need to be depreciated. This means their cost is written off over their useful lives. Useful life is an important consideration when performing capital analysis as this shows the offset of the cost of this asset in a balance sheet. Depreciation will show up as a line item under expenses on the income statement, which we will learn about next. If your capital project is one where the technology can be expected to change rapidly, depreciation expenses will be greater over a shorter period of time. In this case, your analysis will need to show a higher revenue impact to offset higher yearly depreciation expenses. Your Financial Review Committee will be looking for this. Depreciation will also be used in key financial ratios to measure debt capacity.
| Review a typical hospital balance sheet |
LIABILITIES
Current liabilities are amounts that must be paid within one year and may include the following;
- Installments of long term debt
- Capital lease obligations
- Accounts payable (amounts due suppliers)
- Accrued expenses (interest, wages, taxes, etc.), etc.
Long-term liabilities are amounts due creditors after one year and may include;
- Deferred third-party reimbursements
- Estimated malpractice costs
- Long-term debt
- Capital lease obligations
NET WORTH/FUND BALANCE
When total assets are subtracted from total liabilities, the remainder is called net assets (also known as net worth or fund balance). Financial lenders will look at an institution’s net assets to determine bond ratings and risk. Bond ratings are a very important measure for an institution as it will answer the following questions:
- Does the organization have enough debt capacity to obtain finance dollars?
- If they can, what rate will they have to pay (lower bond ratings = higher interest rates)?
CAPITAL ANALYSIS IMPACT
How will a “good for business”capital project affect the balance sheet of an institution? Through capital analysis that supports your institution’s financial goals, your project will impact the balance sheet in three ways;
- By improving the cash flow, or current asset side of the balance sheet.
- Minimizing the debt of the capital project in relation to the cash it generates.
- Positively impacting the overall net worth, thereby making it easier for your institution to obtain money to buy new technology and finance expansions.
|
