Financial ratio analysis for healthcare organizations

Finance

Describe the following 4 types of costs:

Fixed- fixed costs are business costs, that are constant given a certain level of production

Variable- variable costs are cost that vary as output increases or decreases

Semivariable- an expense that contains a fixed component and a variable component.

Semifixed- costs that are constant within a defined level of activity but that can increase or decrease when activity reaches upper and lower levels

Dynamic Medical Suppliers, Inc. has sales of $300,000 for the calendar year of 2010. Its total variable costs equal $107,700. Calculate the contribution margin ratio, and determine whether it presents profit or loss to the organization

CM Margin Ratio= Contribution Margin/Sales

Sales of $300,000- Variable costs of $107,700= $192,300 Contibution Margin

$192,300/$300,000= 64.1%

Profit= ($300,000 x .641)- $115,000= Profit of $77,000 to the organization

You create the schedule for the nursing staff in the pediatric intensive-care unit. Your daily staffing uses 6 registered nurses (RNs) working 8 hours and 2 licensed practical nurses (LPNs) working 3 hours. Determine the number of work hours required for 1 day.

6x8= 48 +6= 54 Work hours required per day

Understanding financial ratios can help the health care organization analyze its credit. Financial ratios should be compared to other financial information within the organization. Values used in calculating financial ratios are taken from the balance sheet, income statement, and statement of cash flows.

• Liquidity ratios tell whether the health care agency is able to meet its financial obligations.

Are there assets or cash available to pay the bills?

Current Ratio of $743,500/$300,000= 2.47

The company has twice as many assets and it does current liability. The company has nearly $2.50 in assets for every $1.00 in liabilities. To determine if this is appropriate, the analyst would want to use comparative ratios with other companies of comparable size and scope. Without any other market information, this ratio seems adequate given the company does not have a lot of debt coming due within the year. It can easily finance the interest payments while having enough cash to pay off principle amounts.

ROA=10.9%

This seems to be adequate, however, comparison with a peer group would be recommended. The company generates 10 of profit for every $1 of assets. This indicates that management is successfully using assets to generate profit for the firm.

The company overall seems to be doing a fairly good job a maintaining its liquidity and solvency. The firm generates nearly twice the amount of expenses in terms of revenue. The company has strong liquidity with higher cash reserves. The only troubling aspect of the balance sheet is the excessive amounts of account receivable. This figure should be evaluated for credit quality of customers who have been extended credit. If accounts are deemed uncollectable, an account for the allowance of bad debt should be created. Inventory should also be reviewed for impairment and potential write-down, as it may become obsolete due to age or new technological advances.

Using the information provided in Part II, determine the break-even point for the organization.

Sales = $375,000

Variable Costs= $63,730

=311,270

311,270/375,000=83%

Breakeven

311,270/83%=$375,024.09

Using information provided in Parts II and V, identify actions the organization's management team can take to assist the organization in reaching its break-even point.

First management should evaluate its credit terms and the credit quality of the individuals that it extends credit too. By relaxing credit terms, the firm could generate receivables that will allow it to reach the breakeven point. However, these individuals may default on their obligations, ultimately costing the firm money. Management may also look to raise prices or control expenses as the profit margin of the firm is only 4% with a ROA of only 10% Management may not be using its assets as effectively and efficiently as possible. Management may also look to deploy its cash in an acquisition or new product development as its current ratio seems to be very high. A high current ratio is good from a solvency standpoint, however too much cash may lower ROA as management is not getting an adequate return on cash that remains idle. It may be more ideal to deploy the cash in profitable activities or projects that ultimately allow the company to reach the breakeven point.