Essay Sample on Financial Healthiness Analysis: Key to Healthcare Organization Success

One of the essential characteristics of any healthcare organization is its financial performance, as well as its condition, which is usually referred to as the financial healthiness. In conducting financial healthiness, a company must conduct its financial analysis. With the use of financial analysis, the healthcare can ascertain its financial capacity to meet its mission. Besides, the financial analysis will focus on the financial strengths and weaknesses of the organization. The financial analysis entails the assessment of the stability, viability, as well as the profitability of the healthcare organization. This is mainly done by the specialists who prepare reports on the operation indicators as well as the financial ratios with the use of the information drawn from the financial statements. These reports are presented to the top management in healthcare.

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The main goal of the paper is to determine the financial healthiness of the Carter Hospital Center using the categories of the income statement, balance sheet, volume indicators, pricing, as well as the profit indicator. The organization's financial healthiness can be evaluated using the statement of revenues and expenses, i.e., the income statement, which provides the details of the expenses and revenues of the hospitals during accounting, which typically one year. The income statement presents operations in a certain period in a better way than the balance sheet. An entity's ability to earn an excess of revenues over the expenses is an essential variable in many external and internal decisions.

Besides, there are also a number of financial ratios that can be used in checking on the hospital's financial healthiness. This can also be used in determining the likelihood that the hospital will continue as a viable business. The lone figure, for instance, the net profit or even the total debt are often less meaningful than the financial ratios connecting and comparing the various numbers depicted on the hospital's income statement or balance sheet. The financial trend of the financial ratios on whether they are improving over time is an essential consideration. Four main financial ratios can be scrutinized closely for the hospital's vulnerability or strengths. They include liquidity, solvency, profitability, as well as operating efficiency.

Liquidity entails the total amount of cash as well as the assets owned by the hospital and can be easily converted into cash for the management of its short term debt obligation. It is a crucial factor used in assessing the organization's financial healthiness. The two main metrics used in measuring the liquidity ratio are the quick ratio and the current ratio. The quick ratio, which is also known as the acid test, is more precise measurements and is obtained by dividing the current assets with the current liabilities hence excluding the inventory from the current assets as well as the long term debt from the company's liabilities. The cash, cash equivalents, short term investments, or marketable securities, as well as the current accounts receivables, are considered quick assets. For the tables hospital's financial statement, the current ratio is given by $470,000 divided by $345,000, which is equal to 1.362, indicating that there are about 1.362 of the current assets available to pay each dollar of the current liabilities.

In some cases, the healthcare organizations, e.g., Carter Hospital Center financial statements, do not give the breakdown of the quick assets on the balance sheet. Thus the quick ratio can even be calculated if some of the totals of the quick assets are known.

Quick ratio=total current assets-inventory-prepaid expensecurrent liabilities

From the table and the balance sheet, quick ratio is given by $190,000 PLUS $250,000 divided by $345,000, which is equal to 1,275. This quick ratio shows that the hospital has a little more than quick assets in relation to its liabilities.

There is also the liquidity Days Cash on Hand, which measures the number of days that the health care organization could continue to pay its average daily cash obligations with no resources becoming available. It entails the number of days that the healthcare facility could support its operating expenses without the collection of other additional cash. For example, from the table of Carter Hospital Center, there is the DCH of 15o, which means the facility can stop collecting revenue and be able to work on its operations for another 150 days without running dry of the cash. From the table given, Days Cash on Hand is given by $ 1,885,000 minus $40,000 equals $1,845,000. Dividing the $1,845,000 by 365 days gives 5.055. Taking $190,000 divided by 5.055 is equal to 37.5 days.

The solvency as a financial ratio is closely related to liquidity, and it involves the ability of the company to meeting the debt obligations over a short period. This kind of financial ratio evaluates the organization's long term debt in relation to equity or assets. The ratio of debt to equity is a solid indicator of the long term sustainability of the company since it provides a measurement of debt against the stockholder's equity and thus measures the interest of the investor in a company. When this ratio is lower, then it means that the shareholders and not the creditors are financing more of the operations of the company.

In the solvency ratio, there is a debt service coverage ratio, which takes into consideration all the expenses which are related to debt, including the interest expenses as well as the other obligations like the pension. In this case, the ratio is more telling of an organization's ability to pay its debt than the debt ratio. If the ratio is high, it becomes easier for a company to obtain a loan. This ratio is computed as the change in unrestricted net asset plus interest, depreciation as well as the amortization/maximum annual debt service. From the given table, the debt service coverage ratio is given by $120,000 plus $20,000 plus $40,000 equals $180,000. Taking $180,000 divided by $72,000 equals 2.5, meaning that the hospital generates enough profits to pay off its debt service and hence needs to use some of its savings.

The profitability, on the other hand, indicates a healthcare organization's ability to earn income and also sustain growth in both the short as well as the long term. The profitability ratios compare the expenses and the statement of revenue to show the ability of the organization to generate profits from its operations. Thus for the hospital's financial healthiness, it is essential to determine its financial healthiness. For example, the Carter Hospital Center is depicted to be profitable since it has a profit of $302.5 Million. In evaluating its profit margin, the net income of $120,000 is divided by the total operating revenue of $2,000,000, which equals 0.06. The profit margin thus entails for every dollar obtained 6 cents is kept for profit. It is always better to have a higher profit margin.