The major areas of financial activity within a healthcare organization include the payment of hired personnel, medical billing–the submission of a service from a healthcare provider to a patient’s insurance company–and purchases of medical equipment and supplies–i.e. X-ray machines, syringes, disposable surgical instruments, etc. In addition, the financial activity within healthcare organizations also involves interactions with the selling and buying of pharmaceuticals for patients and services, such as educational programs for the public and patients or research agencies (Gapenski and Reiter). These actions are all supported by capital budgeting, capital management, contract management, planning and budgeting for the organization, financial reporting, and the risk management area of financing (Gapenski and Reiter).
The purpose of an institutional budget is to be able to plan for future goals, allocate resources toward different areas of the organization depending on the level of priority, and to be able to create security to cover regular costs of upkeep for the organization. The major steps within a hospital’s budgeting process typically involve creating estimates of the expected output from the hospital in terms of services and how much they will cost in all areas of the hospital, considering the economic climate and how it may affect the ability for the hospital to maintain income or expenses, creating a budget goal, having each department create and analyze data about financial statistics in their own area, planning a budget hearing, summarizing both the capital and cash budgets, and then submitting the budget to the approving parties (Gapenski and Reiter).
In order to be able to establish the essential tool of the volume indicator within an institution’s budget, one must first determine what is attempting to be measured through this representation. In this case, it would be services offered by the organization, expenses, monetary interactions, etc. This is essential because, in order to determine the price or monetary value of anything statistically within the organizational budget, one must understand the volume that drives this definition. Therefore, the next step is to pick a point in time to base increases or decreases in the volume and utilize as the starting point. Next, one can keep a running total of these increases and decreases in volume over time to be able to see trends and analyze patterns within different areas of the budget.
The major characteristics of an organization’s income statement include the sales revenues, gross profit, cost of goods that are sold, income before taxes, net income, earnings per share, and tax deductions. On a balance sheet, there are three core aspects, which include the total assets (current and non-current assets), total liabilities (current and non-current liabilities), and the total shareholders’ equity (share capital and earnings). The managerial information derived from the statements are immense, as they how the financial health of the institution and are the reference point of any major financial decision. The third requirement that hospitals must have in terms of financial statements is the statement of cash flows, which shows every cash transaction coming in and out of the organization over a certain time period. This is important because it gives more information on how the organization is doing in terms of financial operating and investing at that time.
The functional definition of a financial statement includes the organization’s information to assess the financial state of the organization, while the operating analysis acts as a way to explain the financial performance with operating data. The major aspects of the financial statement analysis include the actual financial statements themselves–i.e. income statement, balance sheets, and cash flow sheets. The major aspects of the operating analysis include a focus on the explanatory aspects of these financial sheets–the driving factors behind the financial decisions. Both of these utilize a ratio analysis to create quantitative representations of data that can be used statistically for financial analysis.
Capital budgeting refers to the capital investment decision-making processes, which focus on the acquiring of land, equipment, buildings, and other materials–i.e. the fixed assets within the organization. This is vital in a healthcare organization because they help determine the overall organization’s financial future through the way that they allow strategic planning (Gapenski and Reiter). Financial analysis should absolutely play a dominant role in capital budgeting because the basis of strategic planning relies on the ability to carry those plans out financial within the organization. The five steps within capital budgeting analysis include the identification and evaluation of opportunities for new assets, the estimation of operating costs, the estimation of cash flows, the risk assessment, and the actual implementation of obtaining the new assets (Gapenski and Reiter).
Gapenski, L. C., & Reiter, K. L. (2008). Healthcare finance: an introduction to accounting and financial management. Chicago, IL: Health Administration Press.
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