St Edith Memorial Hospital indicates a variety of strengths since it has effective facilities, as well as being equipped with competent and skilled personnel. The hospital has adequate number of employees with diverse proficiencies and skills. For instance, the CEO, Michael Gonzel is an administrator and an accountant by profession. Being part of the Management Committee, the CEO has a wide knowledge in accounting field that would help St Edith Memorial Hospital maintain an effective budget. In addition, his administrative skills are fundamental in running the institution effectively. His effectual management of employees confirms this (Hurst 2007, p. 102).
The hospital also boasts of Stefan Kopechnik, who is a consultant surgeon. His skill in surgical operation places the firm in an advantaged position. This is due to his reputation in giving consultancies in matters concerning surgical operation. Chief Pharmacist, Ellroy Jones, is another employee of respected status. He has adequate knowledge in relation to various types of medicine offered by the hospital.
The hospital also has skilled personnel in the IT field which, if utilized well, St Edith Memorial Hospital will be operating in line with the current technology that is applied by various institutions in the medical sector. Competent employees in the field of IT include Seth Doohan, who is currently the IT manager, Kirsty Fitzgerald who serves as an IT administrator, Jed Singh among others. In addition, the local achievers, who form part of the hospital management committee, are capable of advising the management on the best strategy with regard to implementation of policies that would see its mission and vision achieved without mishaps (Wood 2005, p. 76).
St Edith Memorial Hospital has a number of weaknesses, which abate its position in the medical industry relative to other hospitals, such as the Neighbouring Hospital. Firstly, St Edith Memorial has few numbers of staffs in comparison to the Neighbouring Hospital. For instance, in the year 2009, the number of staffs employed in Neighbouring Hospital was 1,150 while that of St Edith Memorial Hospital was 970. In the year 2010, the number of staffs working at St Edith Memorial Hospital rose by 30 while that of Neighbouring Hospital rose by 50. The small increase in the number of staffs indicated that St Edith would only be able to serve few numbers of patients. On the other hand, the current 1,100 staff members working at Neighbouring Hospital will be able to serve more patients in a day in relation to St Edith Memorial Hospital (Wittner 2003, p. 355).
The number of in-patients that would be served by 350 beds available at St Edith Memorial Hospital will also be less in comparison to 450 beds available at Neighbouring Hospital (Chadwick 2002, p. 46). A few number of staffs and beds lead to limited number of surgery operations carried out in a day. It as well leads to inadequate number of patients treated on an annual basis. Insufficient personnel and bed facilities at St Edith Memorial Hospital caused a weak a ratio of outpatients to those committed to hospital of 3:1 in the year 2009 and 2010. Conversely, the neighbouring hospital recorded a ratio of 4:1 in the year 2009 while in 2010 the ratio increased to 5:1. The inadequate facilities also led to high number of further referrals since it increased from 14% in 20009 to 17% in 2010. This indicated a higher level compared to Neighbouring Hospital, which increased from 7% in 2009 to 9% in 2010.
St Edith Memorial Hospital is presented with a good number of opportunities in its environment. Firstly, the medical insurance companies in the market provide St Edith Memorial Hospital with potential revenue from the policyholders. However, selection of the St Edith Memorial Hospital will mainly depend on the quality and the standard of services offered by the hospital. The hospital as well stands a chance of getting enough packages from the government. The central and local government funds benefit most hospitals with grants that target to help public members, who are not able to pay hospital bills (Wittner 2003, p. 84).
This amount of grant offered will, however, depend on the performance and the management of the firm. Presentation of sound projected financial statements will enable the hospital to receive a considerable amount from both local and central government. The hospital is also in a position to gain from outsourcing services relating to IT and other departments.
Similar to other organizations in diverse industries, St Edith Memorial Hospital also faces a number of threats in the medical sector. The hospital faces stiff competition from similar hospitals, which offer perceived quality services. St Edith Memorial Hospital is currently facing harsh competition from the neighbouring hospital considering that most medical insurance companies are now seeking services of Neighbouring Hospital. St Edith Memorial Hospital facilities such as beds are insufficient since they fail to serve a good number of patients.
Quality services such as post-operation period of 10 days offered by Neighbouring Hospital have become a threatening factor to St Edith Memorial Hospital, which allows patients to stay for 7 days at the hospital following operation. The hospital is as well facing a threat from the current technology in the medical industry. Demonstration of the need to have handheld PDA units, as well as its opposition is a clear indication that St Edith Memorial Hospital is falling behind the technology. This proves that in case the hospital fails to implement strategies that are able to address the dilemma posed by the business environment, there would be a likelihood of St Edith Memorial Hospital falling due to heavy financial deficits (Jones 2002, p. 58)
Budgetary planning and control processes for Income, Expenditure, and Capital Investment
Budgetary planning and control processes for income, expenditure and capital investment are pertinent processes while attempting to manage activities of an institution. In particular, budget forecasting has become an inevitable financial tool amongst various organizations. Budgets are normally prepared in a weekly, monthly, quarterly, semi-annually and yearly basis. Most of the budgets compel organizations to work hard towards achievement of predetermined targets. Therefore, it would be necessary if St Edith Memorial Hospital would consider both internal and external environment before preparing its budget (Dyson 2004, p. 37).
This has the objective of ensuring that a budget remains unbiased, as well as ensuring it is pragmatic. As a result, all factors that affect actual budget should be ensured that are sufficiently incorporated in the projected budget. For St Edith Memorial Hospital to make sure that its budget turns out to be realistic, it should also incorporate technological changes. Notably, many traditional budgets only considered price and costs as the main factors that affect an actual budget.
The year 2009 financial statements indicate that St Edith Memorial Hospital had a zero surplus since its income was118, 000,000 pounds while the costs were 118,000,000 pounds. However, in the year 2010, the hospital experienced a deficit of 10,000,000. This happened is after the hospital’s income fell to 115,000,000 pounds while its costs rose to 125,000,000 pounds. The company is furthermore expecting more losses in the near future. The management anticipated that in the next three years losses would rise to 75,000,000 pounds if the current situation is not rectified.
The problem would persist if corrective actions are not taken. A number of factors lead to such heavy deficits faced by the hospital. As mentioned earlier, changes in technology are important to incorporate into projected budget. For instance, failure of St Edith Memorial Hospital to fit the institution with handheld PDA units that record real-time data of patients will automatically lead to stiff competition since services offered by St Edith Memorial Hospital will be perceived of poor quality as compared to other hospitals in the same region (Coombs, Hobbs & Jenkins 2005, p. 67). A number of medical insurances are now seeking services of Neighbouring Hospital since the facilities at that hospital are attracting. Income from the medical insurance sector boosts the total income of various hospitals by great margin.
It would therefore be prudent to invest substantial capital in technology given that it will attract patients who are interested in quality and standard of services offered by hospitals. However, currently St Edith Memorial Hospital should outsource technological skills and facilities from outsourcing companies to lower costs associated with IT and communications. This is likely to increase income from private patients, especially policyholders of various medical insurances who seek quality services. However, current costs that are directed towards designing new applications will lead to increase in unnecessary costs.
Considering that central government is focused at reducing its grant in a bid to cut the level of taxes, it would be wise to cut costs of the hospital associated with employees. In 2009, employees earned 53,000,000 pounds. This amount increased to 55,000.000 pounds in the year 2010. This is due to the fact, that management had increased the number of staff members from 970 to 1000 without increase in productivity.
For instance, the actual number of patients treated annually residentially reduced from 10,900 in 2009 to 10,650 in 2010. In a bid to address the emergency issue of increasing costs due to expected increase in inflation rate, St Edith Memorial Hospital will have no choice but to sent away some of its employees to ensure that its survival in the next 5 years is assured (Dyson 2003, p. 98). The hospital’s increase in the number of beds will take care of future increase in the number of patients. These measures will help St Edith Memorial Hospital maintain its position in the medical sector without suffering more deficits.
St Edith Memorial Hospital Income and Expenditure Statement for Year 1 and 2 (£000)
|Income streams||Year 2||Year 1|
|Income from central government||77,000||77,000|
|Income from local government||21,000||20,000|
|Income from medical insurance||79,000||65,000|
|IT and communications||1,000||1,000|
|Other variable costs – catering, laundry||11,000||10,000|
If St Edith Memorial Hospital will come up with effective strategies, they will be able to achieve a surplus of £42,000,000 in year 1 and later on earn £45,000,000 in year 2. This needs a more rigorous strategy that takes advantage of the available opportunities at the market (Raghuram & Zingales 2003, p. 127). This will also include attempting to earn a competitive edge at the market. To claim large share in the market require concerted efforts on the part of the management. Since the government is threatening to decrease its grants given that it is focusing on cutting taxes imposed on various elements of economics, St Edith Memorial Hospital remains with the private patients majorly from the insurance sector as the main source of income.
In this view, it would be necessary for St Edith Memorial Hospital to attract the medical insurance companies to its services. Most insurance companies will take their esteemed customers to hospitals that offer quality services. Considering that there is stiff competition from various hospitals such as Neighbouring Hospital, it would be essential for St Edith Memorial Hospital to install facilities that offer highest quality medical services. The services offered by the medical staffs should also be more appealing. This would include increasing the post-operation days to 11, which exceeds that of Neighbouring Hospital. Although this will initially put pressure on the available capital but at the end of the year, the hospital will have recorded the highest number of patients than ever. This will automatically lead to higher profits from the medical insurance sector.
The company should as well forward appropriate and creative budgets to the government, which will push the government to allocate adequate funds for the hospital facilities. Funds from the government will initially be used to expand its facilities, such as increasing number of beds to accommodate more patients without straining on few facilities. However, the hospital will face some increase in costs such as those related to drugs. This will be attributed to the fact that the number of patients demanding more drugs would have increased. Nevertheless, the amount associated with employees costs will reduce because the hospital will have reduced the number of medical staff.
High number of employees increases avoidable costs. Nonetheless, St Edith Memorial Hospital will increase the number of staffs as the number of patients starts to rise. This will ensure the hospital achieve the above mentioned income and expenditure statement.
Cost Benefit Analysis
Various individuals and institutions use Cost Benefit Analysis in determining projects that are worth to invest in them. The Cost Benefit Analysis normally compares benefits and costs associated with any project in order to determine investment that is appealing an investor. A financier is sometimes confronted with a number of options from which he or she is supposed choose one investment. In such cases, an investor is forced to choose an option with the highest present value. Calculating the present value of both costs and benefits is essential in determining which project is attractive. This is because a dollar today is not equal to a dollar after one year. It is therefore necessary, to determine the present value of earnings that are obtained from a given project at a certain intervals (Bodie, Kane & Marcus 2008, p. 73).
In normal circumstances, investors choose projects whose benefits exceed costs. Sometimes analysts use ratio of benefits to costs. In this case, an investor should choose a project that has a ratio of benefits to costs of more than one. In some scenarios, it turns out difficult to determine value of certain costs or benefits. In such events, one is supposed to determine the foregone cost, which should be measured at the market price.
St Edith Memorial Hospital should carry out a Cost Benefit Analysis to consider whether it is worth to proceed with the integrated stock management and creditor system. It will only appear significant to continue with the investment in the stock management and creditor system if the benefits associated with it will exceed the costs. Otherwise, the project will be rejected.
The expansion of Communication and Information Technology is expected to reduce costs that are associated with employees, as well as other savings. In this regard, St Edith Memorial Hospital believes that purchase and development of integrated stock management and creditor payment system will help the hospital save costs that are paid employees to execute the same activities. Proposal that is provided by the IT department with regard to purchase and development of the system is as shown below:
- Purchase and Development cost £1,000,000
- Staff savings year 1 £ 50,000
- Staff Savings in all future years £ 100,000
- Other savings £ 50,000 per annum
In relation to this investment, St Edith Memorial Hospital’s management is considering the option under a spend-to save initiative. The hospital will seek grant externally but it has to demonstrate a return over 8 years at the rate of 4%.
Costs and Benefits of the System Over 8 Years Period (£ ‘000’)
The above table indicates savings and costs associated with the system for over eight years. The last row shows the total value of the project at the end of the year. The table generalizes costs that the management would incur if they select to purchase and develop the integrated stock management and credit payment system. At the beginning, indicated as year 0 in the table, the firm will incur costs amounting to £1000, 000. These are costs, which are associated with the purchasing and development of the system. In the first year, staff savings will be £50,000 while other savings will amount to £50,000. In total, first year savings are £100, 000. However, from year 2 to year 8 the amount saved by staff and others equal to £150,000 per annum.
The table below will compare future values and present values of both costs and benefits.
Future Values and Present Values of both Costs and Benefits (£ ‘000’)
Present Value = Future Value/ (1+ rate of return) ^n where n is the number of years.
Total present value of costs = £1000, 000
Total present value of benefits = £961.87
The benefits is less than the costs by (£961.87 – £900,000) £38,130. This confirms that the management should not proceed with the project since its benefits are less than the costs by £38,130. The period upon which an investor needs his or her full return back matters if one accepts or rejects a project. For instance, return for this project was required back within a period of years. Perhaps someone who could take a longer period, say 12 years could have accepted the project since at the end of 12 years benefits would have exceeded benefits (Das, Markowitz & Scheid 2010, p. 315). Conversely, for an individual who does not consider time value as important during the selection of a project could have chosen this project since its benefits’ future value can exceed the future value of costs. it also important to note that sometimes a financier is forced to finance a project although costs exceed the benefits. This is common with government projects where a project is carried out with an objective of benefitting citizens. In such instances, governments do not gain from the investment.
Corporate governance has been defined as the relationship existing between shareholders, the company’s directors and other stakeholders. It is also referred as the system by which organizations are controlled and managed (Andrei & Vishny 1997, p.743).
Brief history of UK corporate governance
The UK corporate governance system is portrayed in the contemporary accounts as resembling that of the US. However, the UK corporate governance is a bit different from that of the U.S. In particular, most Britons were sceptical about limited liability in a good part of the early 19th century. Contrast to U.S., the adopted closely-held firms tended to dominate the joint stock company for a long period. Corporate finance in UK is characterized by specialized banking with a clear distinction between investment and commercial functions. Securities markets were essential but local firms at the beginning of industrialization did not utilize them fully (Eliezer & Shivdasani 2005, p. 81).
During 20th century, the London capital market grew in depth, as well as liquidity. In the mid twentieth century, there were good numbers of nationalizations upon which companies were managed in the interest of stakeholders. This denied many firms the chance to be run by strict market criteria. Since 1980s, the stakeholder theory has declined given that privatization and merger were accompanied the removal of stockownership and political struggles weakened the labour movement.
The UK Combined Codes
The best codes of practice that is incorporated in the Cadbury report was aimed at directors of UK public companies. However, directors of other companies outside UK were also encouraged to use this code. In order to improve confidence perceived in financial reporting as well as ensuring auditors provide transparent and impartial financial information, the Cadbury committee stated a number of responsibilities for both shareholders and directors. Directors are to be responsible for corporate governance of companies they manage. Shareholders are linked to directors via the financial reporting system. Auditors on the other hand, provide shareholders with an external objective check on financial statements produced by the directors. Other users especially employees are indirectly addressed by financial statements.
The Cadbury report provides that board of directors should meet on regular basis, retain full control over the company, as well as monitor the management. The report sees non-executive directors as important figures because of the independent judgment they bring to bear on important matters (Nenova 2003, p. 336). The report requires at least three non-executive directors on the board, who are independent of management. The report, furthermore contain provisions for the length of service contracts relating to directors as well as disclosure of remuneration. Audit committee was seen as key board committee. The audit committee has to liaise with both internal and external auditors and provide a forum for expressing their concerns. The committee should review both semi-annually and annual reports. In particular, the annual statement should present a balanced and understandable assessment of company’s position.
There have been a number of reports since the introduction of Cadbury report including Hampel report and OECD guidance. The combined code provides that every company should be headed by an effective board, a clear division between CEO and board, and maintaining a balance between executive and non-executive directors in the board. The final report also provides that appointment of new directors should be made on merit and against objective criteria. Remuneration and re-election of directors should be based on performance. Directors should also ensure effectiveness of the company.
St Edith Memorial Hospital and corporate governance
St Edith Memorial Hospital will remain successful if it adheres to the codes provided by the Cadbury report and the combined code. The UK code is clearly pointed out in the Cadbury report that focuses on addressing a number of issues affecting the UK companies. St Edith Memorial Hospital to some extent is operating in line with the UK corporate governance regulations, which provides the best codes of practice. Apart from the employees of the hospital, the company has local luminaries forming part of its board. The UK corporate governance emphasizes on the balance of the board. It claims that the board should comprise of both the executive and non-executive directors.
The non-executive directors are independent of the organization and will be transparent and impartial during decision-making. The non-executive directors will ensure that concerns of both patients and junior employees are addressed in a way that ensures transparency and fairness.
In matters relating to finances, the hospital still suffers a number of setbacks. St Edith Memorial Hospital is facing financial difficulties as it anticipates the current budget deficit of £10,000,000 to rise to £75 million in the next three years. The institution is expecting the government to reduce its grant since it is focusing on cutting the level of taxes in the economy. This is even the financial position of St Edith Memorial Hospital since it would put it in difficulties. In addition, the hospital is still facing heavy costs from various expenses incurred within the institution. In order to correct the menace, the board should come up with appropriate measures that are able to address the issue (Amable 2003, p. 67).
Considering that these are financial matters, the board should form an audit committee, which shall cooperate with both the external auditors and internal auditors to assess and evaluate the expenses and revenues realized by the organization. This will be the initial step towards assuring investors the exact financial position of the firm. This step is essential as it is provided by the code of conduct. The board should ensure that the management is using effectively the assets of the shareholders. In addition, the auditing of the institution’s financial statements will ensure transparency among the stakeholders. The auditing of the financial statements will also enhance accountability in the management. This will assist the board to stop spending resources on unnecessary projects that may lead more losses.
Other benefits brought about by the corporate governance as regards to the financial statements will include making prudent choices on whether to produce within the organization or to outsource services to other companies that are experts in certain areas. This would avoid unnecessary expenses. This will help boost investor confidence, as well as ensure that their resources are managed wisely (Ferris, Murali & Pritchard 2003, p. 1093). If the board follows good corporate governance, it will avoid losses such as those relating to remuneration. The code provides that directors should be paid according to their level of performance. Their re-election should also be based on performance. If St Edith Memorial Hospital keenly follows the above codes, its board will work hard to ensure the hospital has an outstanding performance.
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