Financial Management in Healthcare Organizations Essay
As a health care manager, daily management tasks include financial management. Financial management includes items such as labor cost, equipment cost, and a budget that controls the operations. Operations requires management planning and control. The budget is created using the basic financial information and accounting principles information that an organization reports in its monthly, quarterly, and annual financial reports.
After learning the basics of financial statements, it is very important for a health care manager to understand the basic five areas of performance that set the financial plan for the organization Financial Management in Healthcare Organizations Essay. Define and provide an example of what the following mean:
- Short-term solvency
- Financial leverage
Define the following terms, and explain why they are important in a health care organization:
- Current ratio
- Total asset turnover
- Debt ratio
- Profit margins
Include a minimum of 2 reference
Financial Management in Healthcare Organizations
Financial management in a healthcare organization is an important aspect that determines the success of the operational activities of the facility. Any healthcare organization must thrive on sound financial management to ensure that it can finance all its administrative and operational costs. For sustainability of these facilities, a health care manager will be required to perform certain tasks on a daily basis to keep the institution operating efficiently. Financial Management in Healthcare Organizations Essay.
The key management tasks that a healthcare manager must deliver promptly include management of the financial resources of the healthcare facility. Financial management in a healthcare facility entails ascertaining all the items relating to the labor cost, equipment cost, and the operational budget. It is, however, important to note that effective operation of healthcare facilities require proper management planning and control. Financial Management in Healthcare Organizations Essay. Besides, the operational budget is created in conformity to the basic financial information and accounting principle just like other entities in different sectors of the economy
The basic areas of performance that define the performance of a healthcare facility are the profitability and efficiency ratios that must be incorporated into the organization’s financial plan. Below are the definitions and explanation of the significance of various profitability and efficiency ratios that the management of a healthcare organization must acquaint them with to achieve efficient and healthy performance.
Financial Performance Areas in a Healthcare Organization
This refers to a metric ratio which is utilized in the measurement of the ability of a healthcare institution to meet its debts with the inclusion of other obligations to achieve the short-term financial goals (Berger, 2008). Short-term Solvency ratio is a good indication as to whether the cash flow of a healthcare organization is self-sufficient to ensure that it meets its liabilities in both the long terms and short-term aspects. Therefore, with reference to a healthcare organization, the lower the solvency ratio it is likely to have, and the increased the probability that, the healthcare institution will default in its obligations to meet the long-term and short debts. There exist various types of short-term solvency ratios within a healthcare organization.
These include but not limited to; ratios of interest coverage, debt to equity ratios and total debt to total assets ratio. A healthcare facility operating under short-term solvency can easily finance its administrative and operational expenses with the revenue collected from the service offered without relying on insurance reimbursements and donations from other charitable entities Financial Management in Healthcare Organizations Essay. To obtain this ratio, the current assets and liabilities are key requirements. For instance, if a healthcare organization has assets amounting approximately to $20,000,000 whereas its liabilities amount to $10,000,000, the short-term solvency ratio results to 1.2.
This refers to the day to day actions which take into consideration production, distribution, and utilization of services in a healthcare setting. Therefore, the actions that will be taken to ensure that medical services are provided to meet the healthcare needs of patients will largely form the activity (McLean, 2003). The efficiency with which a healthcare organization runs its activities can be ascertained through calculation of activity ratios Financial Management in Healthcare Organizations Essay.
This involves estimation of the ability of a healthcare facility to turn its liabilities, capital and assets into either sales or cash. For the sake of efficiency and sustainability, a healthcare facility is required to increase the values of its activity ratios. Examples of activity ratios that a healthcare facility management needs to understand include accounts receivable turnover, inventory turnover, and total assets turn over. All these activity ratios are measures against the sales of the healthcare facility in terms of revenue earned from the provisions of healthcare services.
The significance of activity ratios is that they help the management of the healthcare facility to identify the best way of managing the operations of the facility for sustainability. Once the management of a healthcare facility has identified the areas that register fewer activity ratios, it takes the necessary measures to improve the values, thus increasing its sustainability. Examples of these activities include performing diagnostic tests, performing surgery, providing medication to patients’ in both inpatient and outpatient care setting among others. Financial Management in Healthcare Organizations Essay.
Financial leverage in the context of a healthcare facility may also refer to the difference between the assets and liabilities of the healthcare facility (Berger, 2008). A healthcare facility with more assets than its liabilities is said to be highly leveraged as compared to a healthcare facility that has more liabilities than assets. In this regard, a healthcare facility will require the knowledge of financial leverage to effectively manage its assets and liabilities to avoid cases of collapsing in the process of offering its services. It is also referred to as trading on equity.
The significance of financial leverage to a healthcare facility is that it gives the entities an opportunity to monitor its assets alongside its liabilities for effective performance. Financial Management in Healthcare Organizations Essay. A perfect example is an instance whereby, a hospital utilizes cash amounting to $1,500,000 and goes ahead to borrow $ 3,500,000 for the purchase of medical equipment and supplies, amounting to a total cost of $5,000,000. Therefore, for such an instance, what is being used as financial leverage control by the hospital is $ 5,000,000 of medical supplies and equipment with its money of $1,500,000.
Profitability in a healthcare setting refers to a measure which determines the range of the profits made by a healthcare organization relative to its size. Moreover, profitability can be well-defined as the possibility of a healthcare organization to achieve a return on investment as grounded on its resources and activities (McLean, 2003).The significance of profitability of a healthcare facility is basically the difference between the revenue earned from the healthcare services offered and the expense incurred in financing the operational and administrative overheads. Financial Management in Healthcare Organizations Essay.
A healthcare facility is obliged to operate within its limits to ensure that it remains sustainable. None the less, it has to spend less than it charges for the service so as to earn a substantial income that will be used to finance its sustainable operations in future. More profitable healthcare facilities tend to be more stable and sustainable, unlike healthcare facilities that record less profitability in their operations. For instance, when the margin of net profit of a healthcare organization is more than one, then the healthcare organization can be considered to have profitability.
The financial worth of a healthcare organization, liabilities, assets and services that it provides is referred to as value (Berger, 2008). The value of a healthcare facility also refers to the total net worth of its equipment, facilities premises and other research and development projects it has initiated. It is a significant aspect of the healthcare organization because it distinguishes it from other competitors, thus allowing patients to make decisions on whether to seek medical services from it or its competitors. Values of healthcare facility depend on professional estimates done by professional with vast knowledge and experience in the healthcare environment Financial Management in Healthcare Organizations Essay.
The significance of value to a healthcare facility in promoting sustainability cannot, therefore, be ignored in any way. Majority of the healthcare facilities with high-end health equipment and facility and highly trained specialist healthcare professionals is regarded as a very valuable healthcare institution in the society. This improves the reputation of the facility; leading to more patients attended to thus more revenue earned which in turn leads to sustainable growth. As an example, the value of a healthcare organization is defined by expenses it suffers, worth of its properties and the loss or profits made in the daily provision of services.
Economic terms frequently used in finance management in a healthcare organization
The current ratio is defined an efficiency liquidity ratio which is used a measure in the determination of a healthcare organization to pay short-term requirements. Just as the definition depicts, the ratio only considers current assets and current liabilities as possessed by a healthcare organization (McLean, 2003) Financial Management in Healthcare Organizations Essay. The importance of a current ratio to a healthcare organization cannot be underestimated since it is the determinant of the liquidity of a healthcare organization to pay liabilities in the short term.
A healthcare facility with the high current ratio is more liquid since it can easily pay all its current liabilities with the help of its current assets. On the other hand, a healthcare facility with a lower current ratio is less liquid because its liabilities are more than its current assets and thus the facility has to rely on other sources of finance to fully settle its current liabilities. Financial Management in Healthcare Organizations Essay The significance of current ratio to a healthcare facility is that it enables the healthcare facility to effectively plan how to offset its liabilities and assents without operating out of its budget. Therefore, by the use of the current ration, a healthcare organization is in a position to estimate its ability to settle its liabilities with attention to critical financial issues that may be faced at a particular given time.
Total asset turnover
This is a financial ratio which is the determinant of the proficiency of a healthcare organization to utilize its assets in terms of generating revenue (McLean, 2003). A healthcare organization which maximizes on its available assets to ensure that more revenue is generated for the organization to facilitate its efficient performance is financially healthier in comparison to that healthcare organization which does not maximize full use of its assets to generate revenue. Financial Management in Healthcare Organizations Essay.
Total asset turnover is an indicator ratio which can be used to determine the efficiency of a healthcare organization in the deployment of its assets so as to generate revenue. A higher total asset turnover ratio is a performance indicator that a healthcare organization generates more revenue per asset. Since profit margins in a healthcare organization can also be determined by the total asset turnover, it is, therefore, possible for to determine mechanisms in which performance and general operations can be improved.
Healthcare organizations incur debts just as any other well-established business organization. Therefore, debt ratio refers to a financial ratio which measures the extent of leverage of a healthcare organization. It can also refer to the total ratio of the total debts in both the short term and the long term to total assets conveyed in form of a percentage (Berger, 2008). A high debt ratio for a healthcare organization is an indication of its high leverage which implies a great financial risk for such an organization. Alternatively, this can be denoted as the proportion of the assets of a healthcare organization which are financed by debts Financial Management in Healthcare Organizations Essay. In this manner, debt ratio can be used by a healthcare organization management to estimate its debts and plan for payment accordingly.
Profit margin is associated with the gains made by a healthcare organization from day to day operations in relation to expenses and revenues. It is defined as a degree of the amount by which returns made from sales exceed incurred costs irrespective of a minimum limit on the excess made (McLean, 2003). Financial Management in Healthcare Organizations Essay A healthcare with high-profit margin is more stable sustainable. It is in a position to earn more income from its operation, which can be used to improve the quality of healthcare provided.
More profitability also indicates that a healthcare facility is in apposition to finance research on chronic disease without relying on donors. The significance of profitability to healthcare facilities is, therefore, to help the organization remain afloat throughout their operations. For instance, one of the activities that take place in a hospital is dispensing of medicine at different prices. In consideration of the dispensing of a drug at a cost of $30 whose purchase price was $25, the total amount of revenue that is made from the sale of each unit of such a medicine amounts to $5. Expressing this revenue amount in terms of profit margin is equivalent to 25%. Financial Management in Healthcare Organizations Essay.
Berger, S. (2008). Fundamentals of healthcare financial management: A practical guide to fiscal issues and activities. San Francisco: Jossey-Bass.
McLean, R. A. (2003). Financial management in healthcare organizations. Clifton Park, NY: Delmar Learning. Financial Management in Healthcare Organizations Essay