Financial information in health care institutions
Health care organization operates like any other organization meaning that they strongly rely of financial information. Managing money is the first role of financial information in health organizations. Managing the risks associated with finances in every organization is also catered by financial statements. If an organization has strong financial information, it is able to address all needs and provided adequate health care services to the patients (Cleverley, 2017). Financial information is used in evaluation the effectiveness of the goals implemented financially and planning for future developments like emergency rooms. Long term decisions are made in hospital for investments which may call for financial team to evaluate the amount to be used building the emergency rooms in future. Financing all the current and future plans requires the management to use financial information to make effective utilizations of available funds.
There are four financial information used in health care organizations. They include the balance sheets, the statement of shareholder’s equity, income statements as well as cash flow statements. The balance sheets in health care portrays the position the organization is levelled at a particular time whether it’s making success or failures. Income statements depicts the amount the health care has earned at a particular period of time (Cleverley, 2017). The earnings and expenditures used by any health care are shown by use of income statements. Income generated from the patients is measured by cash flow statements. Cash flow helps the health care managers to monitor every finance collected from the patients and expenses done to them.
Financial analysis is part of the powerful tools used to determine the health of organizations. The different methods of financial statement management get applied in organizations to determine feasibility, stability, and organization of firms (Will et al. 2001). Different key stakeholders who have an interest in the organization like managers, shareholder, and financiers require financial statement to determine the health of the firms. In the field of hospitals and care centers, the hiking hospital expenditures are rising concern to the government. For-profit hospitals have centralized and reduced costs as compared to nonprofit government hospitals. There are three principal techniques used in financial statement analysis. These include vertical, horizontal, and ratio analysis.
Horizontal financial analysis is the primary methods which involve monitoring financial transactions form reporting to reporting. The method includes drawing a line on profits and cost of sales to determine whether the business is growing. The horizontal method involves comparison, like gross income and net income (Drummond et al. 2015). For instance, if gross profit in the hospital increase, but net profit declines, the management will use the data to determine whether they need cost-cutting.
The second technique is the vertical financial analysis. Representations in these techniques are expressed as percentages of specific headings. In vertical analysis, assets and liabilities are assumed to equal to 100%. The heading used in this case includes equity, short, and long-term liabilities. The method is helpful in profit and loss accounting and making a comparison between different hospitals as they have similar headings.
The last technique is the ratio analysis. The technique is used to make a comparison between two figures or more within a department. Ratio analysis considers figures from the balance sheet, profit and loss accounts, and other financial accounts. Forms of ratio include the efficiency ratio, solvency ratio, liquidity ratio, and profit and profitability ratio.
Business owners need to understand information about company finances. One of the essential ways of dealing with this is by looking at the organizational assets compared to debts and financed by capital (Waygandt et al. 2018). The accounting equation applies to the double-entry rule of accounting. It represents the relationship between assets, liabilities, and equity.
Assets = liabilities + Equity (Capital)
The equation can be modified with different elements, but the equation should remain balanced. Equity affects both sides of the equation as shown;
Liabilities = Assets – Equity
Equity = Assets – liabilities
The equation can be further expanded to be
Assets = Liabilities + Owner’s Equity + Revenue – Expenses – Drawings
The accounting equation is relevant in that, and it gives business owners a clear picture of organizational financial status. It enhances drawing a comparison between financial statements. It is useful in showing the financial situation of a firm at a specific period whenever required by stakeholders. The accounting equation is useful when stakeholders decide what to purchase or sell within the organization. It also helps reveal what resources to use when paying debts (Weetman 2019). It is also the simplest ways to track transactions within a business entity.
Cleverley, J. O. (2017). Essentials of Health Care Finance. Burlington, MA: Jones & Bartlett Learning.
Drummond, M. F., Sculpher, M. J., Claxton, K., Stoddart, G. L., & Torrance, G. W. (2015). Methods for the economic evaluation of health care programs. Oxford university press.
Weetman, P. (2019). Financial and management accounting. Pearson UK.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial and Managerial Accounting, Loose-leaf Print Companion. John Wiley & Sons.
Will, I., Subramanyam, K. R., & Robert, F. H. (2001). Financial statement analysis. McGraw-Hill Internation.