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Ratio Analysis in Healthcare Organizations
Professional affiliation
Healthcare providers often face the task of managing their facilities under very tight budgets. Whether the provider is a big healthcare organization or a newly founded one, it all comes down to financial analysis.
Financial analysis entails the use of ratios and this process of using ratios to rate your company's performance is what is known as financial ratio analysis. There are several ratios computed in the financial analysis and these ratios are then analyzed in a more intensive manner using several criteria. For a healthcare provider, a comparison of the ratios with other ratios of other healthcare providers will ultimately give a clear picture of the performance and effectiveness of your organization. This needs not to be done by a good financial analyst who can give the management adequate information as to the results of the ratios. For the management the financial ratio analysis is an invaluable asset to them.
Importance of ratio analysis
Several financial statements are produced during an accounting period of a business, whether it is healthcare related or not. They may be produced quarterly, semi-annually or even annually. In the end the management has several financial statements to look at namely the balance sheet, the cash flow statement and the profit and loss account statement. These statements, when presented to the management are very complex and they find it hard to get the required picture of the organization. Therefore, the financial ratio analyses come in to simplify the statements by utilizing professional analysts of the financial statements. This in turn helps the management in the comparison of the healthcare organizations...
Basically any business set up should be geared towards growth and without this the management will close shop. Therefore, as they attempt to read the financial statements they, they become well versed on the standing of the business financially and they will be able to make proper budgeting plans for the facility.
Finally, financial ratio analysis will help the healthcare organization to determine its financial liquidity on demand. This is otherwise called as the firm's liquidity position, while at the same time an analysis of these firms will ensure that the management has a clear understanding of the organizations long-term solvency.
Given that one is to analyze a company, for this matter a healthcare facility's financial statement, the analyst will have to compute several types of ratios. They are;
1. Liquidity ratio
2. Profitability ratio
3. Activity ratio and,
4. Leverage ratio.
Liquidity ratio: a healthcare company's capability to repay its short-term debts on demand is calculated using this ratio. It contains several ratios under its name for example; the current ratio, the acid test ratio.
The current ratio: it shows the ratio of the current assets to the current liabilities
Current ratio =
For example given the following data it is easy to calculate the current ratio for the organization:
The two ratios are calculated as below and for any current ratio above 1 it implies that the healthcare facility has…
Bibliography
Daniel L.J. (1997). Advanced Accounting, McGraw-Hill College Publishing,
Eric Press. (1999). Analyzing Financial Statements, Lebahar-Friedman.
Leopold B., John W. (2000). Analysis of Financial Statements, McGraw-Hill
Martin M. Et al., (1994) Accounting for Effective Decision Making. Irwin Professional Press,
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