Introduction
The performance assessment of Riverview Community Hospital (RCH) revealed that the organization had been experiencing some difficulties during the years 2007-2008; the problems could have been caused by the world crisis and seem to have been resolved with the help of the long-term (LT) debt increase. The revenues of the hospital proceed to rise, but the 2007 crisis had been affecting most of the performance indicators and, as a result, the excess revenue the year 2009 is lower than that of the year 2006.
The core of the problem, however, could lie in the fact that, in terms of the industry, RCH has a relatively low asset turnover ratio, which may indicate deficient asset management. In general, the financial data of RCH for the years 2005-2007 produces the impression of a non-profit hospital attempting to maximize profit, which has been described as a common mistake of not-for-profit organizations (Curtis & Roupas, 2009). The more recent data might indicate a change in the assets management, but the increase of asset turnover ratio is still relatively low.
Therefore, the recommendation for RCH would include paying particular attention to the assets management efficiency: this could presuppose a thorough investigation of the problem and the assessment of its importance as the first step. Given the limitations of this report, the conclusion concerning the significance of the problem cannot be made here. Other recommendations include paying attention to the staffing problem, which seems to have appeared, along with the new threats in the market, that is, the aggressive policy of the new player. In the light of the latter problem, the significance of the hospital’s efficiency becomes especially visible.
Background
The key issues that are typically highlighted in the course of financial analysis include the profitability of a company, its effectiveness, and efficiency (particularly concerning assets management), ability to pay the debt, and other factors depending on the organization or situation (Zelman, McCue, & Glick, 2013). The ones pointed out by Zelman et al. (2013), for example, include the necessity of equipment change and the possibility of acquiring new debts. The importance of quality equipment in the sphere of healthcare is obvious; McCue and Nayar (2009) also agree that the debt data is of particular importance for a non-profit hospital since, unlike for-profit organizations, it does not issue stock.
This debt, however, is tax-exempt, and, according to Marcinko and Hetico (2013), it is, in fact, “the most cost-effective source of funding” (p. 29). In the end, the financial statement analysis demonstrates the strengths and weaknesses of a company as well as its typical behavior; this is the information that is important to all the shareholders, including the managers (Kang, 2010). McCue and Nayar (2009) point out that it is not unusual for non-profit organizations to mimic the behavior of for-profit ones, that is, to seek to maximize profitability (315). At the same time, for non-profit organizations, it is the efficiency that needs to be maximized, particularly under the pressure of competition, and the government that requires providing better quality service while spending less (Curtis & Roupas, 2009; Marcinko & Hetico, 2013).
There are different approaches to financial statement analysis. For example, horizontal analysis, the one used to define the development of the financial state of a company with time, allows the researcher to find out and highlight the typical behavior of a company, which is why it is chosen for this report. It can be said that the new CEO assistant will be able to get acquainted with the company in such away. Elements of trend analysis that are concerned with comparing the performance of a company to a “base year” will also be used here to find out how the hospital developed over time (Zelman et al., 2013).
Apart from the direct analysis of the financial statements, different ratios of the figures are also used to define a company’s performance. Several of these ratios are expressed in the Du Point Equation (DE), which, to put it simply, “decomposes return on equity into the margin, turnover, and leverage” (Rich, Jones, Mowen & Hansen, 2012, p. 598). The return on equity means “the profit earned by a firm through the use of capital supplied by stockholders” (Rich et al., 2012, p. 610).
DE proves that it consists of three elements: the first element, margin, shows the profitability of the company, the second one is typically used to show the efficiency of assets management, and the third one demonstrates the share of debt in the assets financing. By analyzing the DE for RCH, a researcher will be able to find out which of the components is the strength of the hospital, and which one needs improvement. It should be pointed out here that the ratios are particularly useful when compared to the industry norms (Cimasi, 2014, p. 127-128). Given the specifics of the healthcare market, this limitation is of particular importance to the current report (Cimasi, 2014, p. 478-482). Apart from that, the industry norms also set a benchmark, outperforming which is not always necessary and, occasionally, can be interpreted as a sign of mismanagement (Zelman et al., 2013).
Other ratios mentioned in the report (mostly in the tables) are primarily used to demonstrate a more consistent image of the development of RCH over years, but most of them can still be classified into the mentioned triad of features.
Analysis
Methodology
The following actions have been undertaken to answer the five questions. As suggested by the questions, the financial statements for the Riverview Community Hospital were interpreted. In this paper, horizontal and trend analysis was carried out to define the trends of the hospital’s development, which is especially important for a new CEO assistant to learn. The most significant figures of the analysis are presented in Table 1. The information from the financial statements was also used to calculate several ratios; their definitions and formulas have been used as suggested by Rich et al. (2012) and Cimasi (2014) or shown in exhibits, and, occasionally, as suggested by the definition of the ratio itself. The ratios are partially presented in Table 1 and Table 2. Finally, the Du Pont equation was used to define the hospital’s financial position as well as its strengths and weaknesses. All the Du Pont ratios are included in Table 2 and are going to be interpreted in the following section.
Interpretation and Discussion
Financial statements: a historical analysis
The most significant part of the historical analysis of the balance sheet and statement of operations is presented in Table 1. The revenues of the hospital had been growing steadily by 5-7% each year until the year 2009 when the growth rate increased to 12%. The salaries of the workers have been increasing unsteadily, with the year 2008 showing the smallest increase. Total expenses have been growing at an increasing rate. The excess of revenues was always positive, but it had been decreasing in 2007 and 2008, with the year 2009 showing a better result that, however, did not allow the hospital to achieve the excess of the year 2006 (see Fig. 1).
In 2007, as the net plant and equipment of the hospital increased by 12%, total current assets decreased, which, apparently has prompted the hospital to increase the LT debt by 20% in 2008. Since then the current portion of LT debt was increased, and the LT is decreasing at a much faster rate than in the previous years.
All these changes are demonstrated and proved by the cash flow statement. Indeed, it is visible, that the increase in the debt by $3.549 million took place in 2008; that before it, in 2007, the ending cash statement was noticeably slower than the beginning, which could have demonstrated the early stages of the financial problems. In the same year, the income from operations (that is, in fact, the adjusted net income) has dropped, which appears to be the direct result of the 2007 crisis and the reason for the difficulties that the hospital had to deal with.
Du Pont equation
The Du Pont ratios are included in Table 2 and underlined to emphasize them. It is obvious that the profitability ratio has been decreasing and moving to the median figure for the industry. At the same time, in 2009, the figure experienced an increase that could signify the end of the financial troubles. Before the crisis, RCH had been performing very well in the terms of the industry, and even now its profitability is higher than the median. At the same time, the asset management of the hospital, its efficiency ratio, appears to be relatively ineffective (compared to the industry data) which is a significant drawback. This parameter has been relatively stable throughout the presented period, varying between 61% at worst and 68% at best, before the crisis (see Fig. 2).
The financial leverage of the hospital has also been decreasing (see Table 2). Unfortunately, this factor cannot be compared to the benchmarks. However, another debt ratio can explain the performance of RCH in the terms of the industry.
Other ratios
Table 2 contains the most significant or comparable ratios. As can be seen from Table 2 as well as from the exhibits, the hospital used to perform better than the average in the industry in the terms of profitability and liquidity, which, however, is currently changing: the figures have decreased, and, while the year 2009 demonstrates an increase, it is generally lower than the pre-crisis performance. It should also be pointed out that the hospital is still profitable, with the rate of revenue growth increasing despite the difficulties.
At the same time, all the debt ratios are decreasing, while moving from the median figure for the industry to the –Quartile. This process shows that the LT debt significance in the financing of the hospital is decreasing (from 40% to 32%), the only exception being the 2008 increase (see Fig. 3). LT debt is a relatively sound decision for a not-for-profit organization, but it is an asset that needs to be properly managed. However, as can be seen from the current ratio, the liquidity of RCH has been abnormally high in the terms of industry. The fact could suggest that the assets of the hospital are not being managed properly, which is proved by the results of DE. The problem of asset management is very visible in this context.
Another noticeable factor is the percentage of staffed beds: in 2009, it equals 84% as compared to 93% in the year 2008. Admittedly, it could have been caused by the failure to increase the salary and wages in 2008 (see Table 1), and now, with the significant increase in the wages, the situation can change in the recent future.
Recommendation
Financial State Summary and Recommendation
From the financial statements (particularly cash flow statement) it follows that, most certainly, in the years 2007 and 2008 significant equipment purchases were carried out, which, in the context of the world financial crisis and subsequent decrease in revenue growth and net income, could have resulted in the problems in funding (Elliot, 2011). The world crisis explains the reduction of most parameters and ratios as well as the decrease in the staff and the need for the LT debt increase. The rate of returning the debt has increased significantly, which allows one to suggest that the increase is not a crucial problem. Other problems need to be singled out.
The hospital has been exceptionally profitable in the terms of the industry throughout the analyzed period. While higher profits are typically regarded as a positive feature, in the case of a not-for-profit organization, the advantages of such a performance can be questioned. Indeed, the hospital produces the impression of attempting to maximize the profits, which is typical for for-profit organizations but makes RHC stand out in the terms of the industry. Apart from that, the unusually high liquidity suggests that the assets could have been allocated with greater success.
This idea is proved by the fact that the assets management ratio demonstrated by RCH has been relatively low for the industry. In a not-for-profit organization, the ability to allocate resources with a maximum benefit is a must, and, while performing remarkably well in most other aspects, RCH is falling short of expectations in this respect. This problem becomes especially significant given two other factors: the debt increase and the competitive threat. Therefore, it can be suggested with some degree of certainty that the assets management of the hospital needs to be thoroughly researched, and its focus on profitability needs to be reviewed.
As for the threat of competition, it is both an aggravation for the asset management situation and a problem of its own. Indeed, while it is only an anticipated threat at the moment, it needs to be taken into account: RCH should be a top-performing hospital to alleviate this suggestion of a threat, which requires getting rid of the problems, especially in case they are confirmed by research. Apart from that, given the fact that the threat is only anticipated and vague, additional investigation into it might be suggested.
First of all, it would require the analysis of the new player’s policy, which, can be studied through the information about its previous expansions. This data will enable the management of RCH to decide whether the improvement of asset management and other performance factors of the hospital would be a sufficient reaction to the actions of the intruder. In any case, the changes in the current market situation must be taken into account by the hospital management.
The problem of staffing, as it has been mentioned, would probably be resolved since, in 2009, the salary and wages expenses of the hospital increased. In fact, in this respect, the crisis could have a positive influence on RCH’s perspectives since it is typically correlated with an increased demand for the working places. In any case, the hospital has been demonstrating top-quality performance throughout its existence, which means that now, in the context of increasing competition, the level cannot be lowered.
To sum up, the recommendations for the RHC include paying close attention to the asset management that exhibits suspicious tendencies as well as revising the hospital’s policy concerning its profitability priority. Consistent research is needed here to define the significance of the problem for the hospital as a whole. Apart from that, the hospital needs to take into account the staffing problems that appear to have arisen. In every other respect (particularly in terms of returning the debt), given the situation of the world crisis, the hospital seems to be performing quite well and needs to keep up the good work.
It should be pointed out that the steady reduction of the hospital’s profitability (that does not render it unprofitable), as well as a slight increase in the assets management ratio, could indicate a change in the policy. The influence of the crisis cannot be denied, but there is a chance that the current management has paid attention to the supposed problem of assets allocation and is already attending to it. Unfortunately, this report is carried out by a researcher who is not yet an “insider” and, as a result, policy information, along with other data, is unavailable for the research. In this respect, the limitations of the report should be mentioned.
Limitations
An important limitation to the recommendations lies in the fact that they are based entirely on the financial statement analysis. While the latter is a very important tool, it does not cover several factors, many of which are also immeasurable. These factors include, for example, the reputation of the organization (that is quite high for RCH), its policies (as it has been mentioned, there is a chance that the policy of the hospital has changed), or the management (that has to be high-quality given the hospital’s performance). These factors can play the most important roles in the understanding of the position of an organization (Cimasi, 2014, 475-498). Apart from that, while a certain comparison with the environment and the hospital performance has been provided, it may be insufficient because of the lack of information on the competitors.
For example, the only thing known concerning the threat of the for-profit hospital is its aggressive behavior. This fact can suggest changes in the market, but it cannot be the ground to a consistent reaction. Apart from that, the information concerning the costs of the hospital’s services could not be attained and compared, which is unfortunate, since this data would allow one to deduce the opportunities and threats coming from the environment. This is why, technically, the recommendations of the report are mostly based on the analysis of the internal factors of the hospital. Therefore, the primary limitation of the report is its incomplete data.
Apart from that, Pflueger (2015) demonstrates that accounting is often influenced by the researcher. In other words, the human factor that could have resulted in a subjective choice of data or subjective data interpretation cannot be ruled out when defining the limitations of the report. The limited knowledge of a new worker who does not qualify to be called an “insider” is yet another problem: it has been reflected in the fact that the reasons for the changes in the RCH performance have only been suggested, not stated.
As a result, the recommendations that have been provided are mostly concerned with pointing out an area that exhibits suspicious behavior and encouraging the hospital management to research it. The insider research provides an investigator with more opportunities due to the “preunderstanding” or preexisting insider knowledge about the organization that a new CEO assistant is not yet included in (Coghlan and Brannick, 2014). In the context of more consistent research of the company, the significance of the mentioned suspicious areas will be defined with greater accuracy, which is the first step towards defining the relevant measures.
References
Cimasi, R. J. (2014). Healthcare Valuation, the Financial Appraisal of Enterprises, Assets, and Services. Somerset, NJ: John Wiley & Sons.
Coghlan, D., & Brannick, T. (2014). Doing action research in your own organization (4th ed.). London: Sage.
Curtis, P., & Roupas, T. A. (2009). Health care finance, the performance of public hospitals and financial statement analysis. European Research Studies, 12(4), 199-212. Web.
Elliot, L. (2011). Global financial crisis: five key stages 2007-2011. The Guardian. Web.
Kang, H. B. (2010). A case study on the archer daniels midland (ADM) company’s financial statement analysis: Strengths and weaknesses. Journal of Business Case Studies, 6(3), 65-70. Web.
Marcinko, D., & Hetico, H. (2013). Financial management strategies for hospitals and healthcare organizations. Boca Raton, FL: CRC Press.
McCue, M., & Nayar, P. (2009). A Financial Ratio Analysis of For-Profit and Non-Profit Rural Referral Centers. The Journal of Rural Health, 25(3), 314-319. Web.
Pflueger, D. (2015). Accounting for quality: on the relationship between accounting and quality improvement in healthcare. BioMed Central Health Services Research, 15(1), 1-13. Web.
Rich, J., Jones, J., Mowen, M., & Hansen, D. (2012). Cornerstones of financial accounting. Mason., OH: South-Western.
Zelman, W. N., McCue, M. J., & Glick, N. D. (2013). Financial Management of Health Care Organizations : An Introduction to Fundamental Tools, Concepts and Applications (4th Edition). Somerset, NJ: John Wiley & Sons.
Appendix A
Appendix B
