HFMA test 4
A measure of the volume and utilization of inpatient services.
Maintained bed occupancy
Component of the capital budget in which Department managers should develop reasonable estimates for what it will cost to replace outdated technology or worn out fixtures and equipment
Maintenance Capital
Define Maintenance capital
Maintenance capital is what is required to maintain a program or facilities at their existing level. Department managers should develop reasonable estimates for what it will cost to replace outdated technology or worn out fixtures and equipment.
A lender allows a borrower to use a specified amount of money in return for a rental fee for use of that money. The rental fee is known as: Principal. Interest. Debt service. A revenue bond.
Interest
Internal control includes five interrelated components:
Internal control includes five interrelated components: 1. Risk Assessment 2. Control Environment 3. Control Activities 4. Monitoring 5. Information & commnications
Define internal control.
Internal control is a process implemented by an entity's board of directors, management, and other personnel
Type of profitability ratio that measures how the price of services exceeds expenses in order to make a profit.
Markup
Define Markup
Markup measures how the price of services exceeds expenses in order to make a profit.
3 Methods of Projecting Statistics and Revenue Budgets:
Methods of Projecting Statistics and Revenue Budgets: Estimate of Demand Past Activity Estimate of the Number of Procedures or Patient Visits
Methods of Projecting Statistics and Revenue Budgets: Past Activity
Methods of Projecting Statistics and Revenue Budgets: Past Activity Past activity assumes that the best measure of what will occur in the future is what has happened in the recent past. Only changes in the group such as additions or retirements of physicians and scheduled fee changes are projected. Past activity assumes that the activity for next year is based on current patient activity level.
Ration Analysis & Pricing of services
Ratio analysis is useful in the pricing of services. Healthcare organizations are looking outward because of the competitive environment and comparing ratios to those of similar or competitive organizations. For example, ratio analysis can determine whether pricing is generally lower or higher than that of similar organizations.
Type of Profitability ratio that measure of how much of the income in a current year is reflective of the change in net assets. The change in net assets should be due to net income
Reported income index
This methodology is used to reimburse physicians through CMS. Each relative value unit is multiplied by a fiscal conversion factor to generate the reimbursement amount. The official name of the methodology is the
Resource-based relative value scale (RBRVS).
straightforward set of calculations that determines the gross amounts to be generated by charging patients for the hospital's services.
Revenue Budget
Major expense category for physician practices?
Salary and benefit costs represent the major expense category for most physician practices. The salary budget is based on a staffing pattern that describes the various skills necessary to operate the practice, including physicians, nurses, other clinical staff, and support staff such as reception staff or billing personnel.
Zero-based budgeting
Zero-based Budgeting: Each year, the department builds projections for volumes, revenues, labor costs, supply costs, and other operating expenses. The basis for projections is the most current information available with respect to each revenue or expense category. Management usually incorporates uniform measurements of productivity and contribution to overhead to ensure resources are consumed as efficiently as possible throughout the organization. Overall assumptions affecting the department (inflation or market share fluctuations) would also be incorporated into departmental projections.
Cash on hand (Days0
[(cash and cash equivalents + board designated funds for capital) x 365] ÷ (total operating expenses - depreciation and amortization expenses)
Formula for Average plant age
accumulated depreciation ÷ depreciation expense
Formula for Debt service coverage ratio
net revenue available for debt service ÷ (principal payment + interest expense)
Formula for Average length of stay
patient days ÷ total discharges
Tax-Exempt Financing
Tax-exempt financing is usually the lowest cost debt available to a healthcare organization, but the organization must qualify as a tax-exempt (not-for-profit) organization, and then must restrict the use of the proceeds for tax-exempt purposes, and proceeds cannot be used in any way that directly benefits an individual or a for-profit organization. Physicians' office buildings are an example of a project that cannot be financed through tax-exempt borrowing.
The Control Environment:---5 functions
The Control Environment: 1. Sets the tone of the organization. 2. Influences the control consciousness of its people. 3. Includes many factors, such as integrity, ethical values, competence, management's philosophy and operating style, and the attention and direction provided by the board of directors. 4. Is the foundation of an organization's system of internal control.
Acid Test Ratio
The acid test ratio, the most restrictive test on liquidity, indicates the assets that can be immediately converted into cash. Only cash and marketable securities, therefore, are used in this calculation. The accounts receivable might take a little bit longer to convert, so we omit it from the acid test ratio.
Capital Budget
The capital budget is an annual process to estimate the resources committed for new projects, equipment, and facilities. Individual capital projects may span several years due to the time requirement to develop and implement the project. Capital projects may involve the start-up or acquisition of a new practice, service, or facility. Expenditures are classified as capital based on expected benefits of two or more years and a minimum investment set by the organization. Because of the significant long-term impact of capital expenditures and the limited resources available in any organization, careful control should be exercised in making capital decisions.
Function of Cash Budget
The cash budget may be considered the most important part of the annual budgeting process. It allows the organization to plan for its continuous solvency; that is, to have the ability to pay bills when due and to avoid unnecessary idle cash or cash deficiencies by timing significant disbursements and implementing a timely borrowing, repayment, and investment policy.
The past activity approach involves the following actions
The past activity approach involves the following actions: a. Evaluating activity by CPT procedure code b. Having data on payer class distribution c. Accurately anticipating expected changes d. Having a fee schedule for any payer representing a material volume of the practice
Three ways that that "estimating demand" useful?
useful tool for planning marketing strategy, locating satellite offices, and initiating long-range planning.
Quick Ratio
The quick ratio indicates how quickly the assets may be converted to cash. Cash and cash equivalents, marketable securities, and accounts receivable can be readily converted to cash.
The required payments of principal and interest are referred to as ?
The required payments of principal and interest are referred to as debt service.
List the 6 uses of ratio analysis
Use of Ration Analysis: 1. Assessing Debt capacity 2. Monitoring debt covenant compliance i 3. summarization of financial data 4. Assessing the short- and long-range financial plan 5. Pricing of services. 6. Strategic analysis.
Users of Ratio Analysis
Users of Ratio Analysis; 1. Board 2. Management 3. Creditors 4. Health System Agencies 5. Employee Unions 6. Rate Regulators
Example of Variable Cost
Variable Cost---Variable costs vary, in total, more or less in direct proportion to volume. An example is the relationship between supply costs and outpatient visits or patient days. For most healthcare organizations, about half of supply costs will vary directly with volume.
Which type of variance would be illustrated by a decrease in the number of procedures performed versus what was projected? Rate variance Volume variance Price variance Efficiency variance
Volume Variance
Which type of variance would be illustrated by a decrease in the number of procedures performed versus what was projected? Rate variance Volume variance Price variance Efficiency variance
Volume variance
Within the operating budget itself, there are three main types of budgets:
Within the operating budget itself, there are three main types of budgets: Statistical budget Revenue budget Expense budget
Which of the following major categories of financial ratios measures the relationship between revenue and assets, that is, to determine the financial efficiency of an institution's operations? Profitability ratios Liquidity ratios Activity ratios Capital structure ratios
Activity Ratio
Ration that measure the relationship between revenue and assets. The numerator is always revenue, a surrogate measure for output
Activity ratio
Benefits of Joint Venture
Benefits Attract physician and for-profit groups as investors. Allow a non-profit organization to enter into a joint venture deal with minimal up-front capital investments due to the tax benefits that flow to the for-profit groups. Allow the parties to combine their financial resources and possibly give them access to additional sources of capital. Allow entities to spread the risks associated with a deal. If a healthcare entity is unable to afford a project in terms of capital investment or ability to absorb the potential losses, joint venturing a project would reduce the risk of insolvency or burden on the entity. This solution will also reduce the rewards if any are created. Allow an entity that be viable on its own to remain competitive in its marketplace.
How much of a practice's expense budget is taken up by salary and benefits?
Big part of the expense budget
A measure of the efficiency of the collections function
Accounts receivable (days)
Describe the factors associated with credit ratings.
...
Explain the importance of reporting on budget variances.
...
Identify the components of budgetary control.
...
Which use of ratio analysis will help an institution decide how much of a debt burden it can feasibly assume? Assessing short- and long-range financial plans Assessing debt capacity Monitoring debt covenant compliance Pricing of services
Assessing debt capacity
current liabilities divided by the amount of operating expenses (with depreciation subtracted) per day.
Average Payment period
The average stay counted by days of all or a class of inpatients discharged over a given period. Used as an indicator of efficiency in containing inpatient service costs.
Average length of Stay
A measure of how efficiently an organization pays its bills.
Average payment period
Average payment period
Average payment period is current liabilities divided by the amount of operating expenses (with depreciation subtracted) per day. Depreciation is subtracted because it is a non-cash item. It is generally preferable for the average payment period to be low and below the median. Average payment period reflects the time required to satisfy obligations to vendors.
Definition of Budget
Budget is a formal plan for future operations expressed quantitatively
an annual process to estimate the resources committed for new projects, equipment, and facilities.
Capital Budget
With which of the following profitability ratios is it favorable to be below the median? Contractual discount percentage Markup Operating margin ratio Return on total assets
Contractual discount percentage
Type of profitability ration concerned with deductions that are taken from revenue
Contractual discount percentages
Which ratio? financial managers and CFOs would like to see that ratio lower, indicating the ability to keep their receivables and other current assets low and investing their cash more productively
Current ratio
Differentiate Debt Service, Annual Debt Service, and Total Debt service
Debt Service---The required payments of principal and interest are referred to as debt service. Annual Debt Service----The required payments of principal and interest for any given year are referred to as annual debt service. Total Debt service---- sum of all debt service payments is referred to as the total debt service under the obligation.
Ratio that quantifies how much income is generated to cover both principal and interest payment
Debt service coverage ratio
debt to equity plus debt
Debt t equity ratio
Reporting The level of distribution for these monthly financial statements should coincide directly with the responsibility of the individual receiving them. What should be distributed to executive management and board?
Distributions of responsibility reports to executive management and the board of directors, bondholders, trustees, rating agencies, etc. should be limited to very broad financial statements, such as: An overall balance sheet, An overall statement of revenues and expenses, and, perhaps, A statement of cash flow for the institution.
Efficiency Variances
Efficiency Variances---- Efficiency variances are the result of a variance in the amount of labor or supplies used for each procedure.
result of a variance in the amount of labor or supplies used for each procedure.
Efficiency variance
Which type of funding could possibly lead to the loss of the control of the company in certain situations?
Equity Financing
Reflects the extent to which assets are funded through equity versus through debt.
Equity Financing Ratio
Which type of funding could possibly lead to the loss of the control of the company in certain situations? Joint ventures Leases Equity financing Long-term deb
Equity financing
Estimate of demand involves three types of data:
Estimate of demand involves three types of data: 1. Demographic characteristics of the area 2. Patient usage rates per department 3. Desires share of market (Potential patient visits that can be expected)
Zero-based budgeting assumes current year results will best predict what will happen in the future. Is this statement true or false?
False
Formula for Cushio ratio
(cash and cash equivalents + board designated funds for capital) ÷ estimated future peak debt service
List the types of budgets
Three main types of Control Budgets: 1. Operating Budget 2. Capital Budget 3. Cash Budget
Formal plan that summarizes a set of expectations integrating the impact of environmental factors and management decisions
budget
Denominator in all three types of Liquidity ratios is
denominator in all three of these ratios is current liabilities
Formula for Capital Expense
(interest expense + depreciation & amortization expenses) ÷ total operating expenses
Accounts receivable (days) Formula
(net patient accounts receivable x 365) ÷ net patient revenue
Maintained bed occupancy Formula
(patient days x 100) ÷ (maintained beds x 365)
Formula for Average payment period
(total current liabilities x 365) ÷ (total operating expenses - depreciation and amortization expenses)
Forumula for excess Margin
(total operating revenue - total operating expenses + non-operating revenue) ÷ (total operating revenue + non-operating revenue)
Formula for operating margin
(total operating revenue - total operating expenses) ÷ total operating revenue
List the types of debt instruments available for capital financing
...
Criteria for a lease to be classified as capital lease
1. A lease is classified as a capital lease if it meets any one of the following four criteria: 2. The lease contains a bargain purchase option. 3. The lease contains a transfer of ownership to the lessee by the end of the lease term. 4. The lease term is equal to 75% or more of the estimated economic life of the lease property, and the beginning of the lease term does not fall within the last 25% of the total economic life of the leased property. 5. The present value of the lease payments are greater than 90% of the fair market value of the item being leased. 6. Some advantages of leasing are that working capital is conserved for other purposes, budgetary control is facilitated, tax benefits may be realized, and the lessee has greater flexibility in replacing equipment that has become technologically obsolete.
A Common approach is to express RBRUV as the following 4 statistics:
A Common approach is to express the following 4 statistics: 1. Number of visits 2. Number of procedures 3. Number of RVUs 4. Number of RVUs per visit
A comprehensive budget for a medical practice includes statements projecting:
A comprehensive budget for a medical practice includes statements projecting: Statistics Operating expenses and revenues Capital expenditures Cash flows
Risk of Joint Ventures
A joint venture includes the following associated risks: If the deal loses money, all parties involved lose money. What could have strengthened the tie with a physician may have the opposite effect. Rewards will be shared if the joint venture becomes very profitable. Tax-exempt status may be endangered by any problems associated with inurement of benefit. Medicare/Medicaid fraud and abuse may be alleged. Federal civil and criminal statutes contain various references to Medicare/Medicaid fraud and abuse. Many forms of physician joint ventures are specifically prohibited under the Medicare fraud and abuse laws.
Define lease
A lease arrangement provides for the payment and ownership of a capital asset as a contractual obligation executed over time, rather than at the time of possession. The parties involved in a lease include the user of the equipment, the lender, and the leasing company. Leases can be divided into capital leases or operating leases.
Indicates the financial age of the fixed assets of the hospital. The older the average age, the greater the short term need for capital resources.
Accumulated Depreciation
the most restrictive test on liquidity,
Acid Test ratio
Define environmental Assessment
An environmental assessment is an examination of what's happening both internally for the organization and externally in the community or region surrounding the organization.
An environmental assessment may include the following:
An environmental assessment may include the following: a. Analysis of regulations at state and federal levels and their impact on the organization. b. Appraisal of labor market issues, including ability to recruit clinicians and physicians. c. Assessment of the economy, employment, and business factors within the community and/or region. d. Evaluation of reimbursement mix and changes. e. Comparison of the organization's performance to its peers and others in the region or comparable entities nationwide. f. Analysis of the current, past, and potential future customers based on demographic data for the service area. g. Understanding of what the competitors in the region or market may be considering or are doing. h. Review of performance indicators: patient satisfaction, financial ratio analysis, volume and outcome reports, etc. i. The assessment provides guidance as to obstacles and opportunities available to the organization.
Define Operating lease
An operating lease is defined as one in which the lessee is liable for the leasing cost for the term of the lease. Equipment and lease renewal options are determined by the fair market value of the equipment. The lessee does not have any ownership right during or after the leasing period. A potential disadvantage of leasing is the consideration that the cost of extending the lease for the entire useful life may be more than the actual purchase price.
Interest rate and assessment of debt capacity
Another step in assessing debt capacity is to estimate the interest rate creditors will require in assuming the risk of lending to the organization. The interest rate will influence the size of the annual debt service as well as the effect on financial performance. The interest rate will generally be determined by obtaining a credit rating from a rating agency. Even when debt is issued without a rating, the investors will informally evaluate the creditworthiness of the issuer.
Which of the following is true of incremental budgeting? Assumes that the current year's results will best predict what will happen in the future Requires the manager to build a series of budgets for differing activity levels Is far more labor intensive than zero-based budgeting Discounts salary costs as a budget item
Assumes that the current year's results will best predict what will happen in the future
Explain the components of a business plan.
Business Plan Components: 1. An executive summary that includes a justification statement, brief history of the issue, a proposal statement, and one or two paragraphs outlining the benefits and cost of the plan. a. A justification statement: What do you want to do and why. b. A proposal statement: What this plan will fix, change, or improve. 2. A comprehensive narrative that describes the present situation, the reason why the situation needs to be addressed, research conducted, alternatives considered, sources of information, etc. 3. A financial analysis, including a pro forma for no less than one year. 4. A detailed action plan, including dates, resources required, and outcomes. 5. Benefits to the organization for approving the business plan. 6. Credible projections of results if the plan is not implemented.
Business Plans definition
Business Plans Business plans may be created by line department managers, executive level leaders, and possibly by consultants, or by any combination of these individuals. The plans must be sufficiently detailed to provide a road map to achieve the plan once it is approved. The plan should include an accounting of resources needed to achieve the plan.
4 key functions of business plans?
Business plans: 1. Explain where one wishes to go and how to get there. 2. Define key performance variables and expected benchmarks or metrics by which progress can be monitored. 3. Explain the present situation (including its history) and describe the purpose of the plan (where the program is headed). 4. Force methodical thinking about what is to be accomplished and how to plan for it.
4 functions of business plans
Business plans: . 1. Explain where one wishes to go and how to get there. 2. Define key performance variables and expected benchmarks or metrics by which progress can be monitored. 3. Explain the present situation (including its history) and describe the purpose of the plan (where the program is headed). 4. Force methodical thinking about what is to be accomplished and how to plan for it
Capital Expenditures
Capital Expenditures The capital expenditure plan may range from a relatively simple list of minor equipment to be purchased based on available cash to very complex multi-year projects. Large projects such as major medical equipment, buildings including real estate, or practice acquisitions require evaluation of many of the same environmental factors and management decisions as the entire budget. The evaluation may contain a higher degree of ambiguity than the operating budget due to lack of a historical track record or access to data or past trends of the organization.
Capital Sources of Financing: Credit Rating
Capital Sources of Financing: Credit Rating Because credit ratings have an impact on the interest rate, the factors used to establish a credit rating should be considered as part of the planning process. The healthcare industry relies on rating agencies to quantify creditworthiness using objective and measurable criteria, as well as assessments of the internal and external business environments. The agencies develop ratings intended to provide comparisons as to the likelihood a borrower will be able to repay principal and interest as scheduled. Not all bonds are rated; however, the purchasers of unrated bonds will evaluate the credit risk using a similar approach. Because the credit rating will significantly impact the cost and availability of capital financing, it is important to prepare and maintain a credit analysis. This analysis will allow the organization to compare its recent financial performance to relevant national standards.
pros and cons Capital Sources of Financing: Long-Term Debt
Capital Sources of Financing: Long-Term Debt The advantage of a private placement is that, because only one lender exists, the costs of originating the issue are reduced. The organization and the lender can define what is important to both parties. A disadvantage might be that the private placement lender would require a particular covenant more restrictive than a public offering would require.
Capital Sources of Financing: Long-Term Debt
Capital Sources of Financing: Long-Term Debt Long-term debt can be obtained from several sources. It can be obtained from a bank either as a long-term loan or as a mortgage, the difference being that the former may have no collateral, while the mortgage is collateralized by a piece of real estate. Long-term debt is most often obtained via a debt issue in the form of long-term bonds, usually tax-exempt finance offerings.
A measure of the capital structure and the degree of flexibility an organization might have in raising capital.
Capital expense (%)
Capital financing method where all of the benefits and risks of ownership have been effectively transferred to the lessee, and the lessor recovers the full price of the equipment plus an interest factor during the lease period.
Capital lease
Capital needs may be funded through any of these four alternatives:
Capital needs may be funded through any of these four alternatives: Long-term debt Equity financing Joint ventures Capital lease financing
Capital requirements may be driven by a range of factors such as the following:
Capital requirements may be driven by a range of factors such as the following: Maintaining the best physical plant to remain competitive Ensuring that equipment, pharmaceutical therapies, and medical and surgical procedures are current to cutting-edge Anticipating and responding appropriately to consumer demands
Define Cash Budget
Cash Budget The cash budget is a product of the operating and capital budget. This budget predicts the cash flow and cash availability, and the income generated from operations and other sources of cash. The cash budget, also known as the budgeted statement of cash receipts and disbursements, is prepared after the revenue, expense, and capital budgets have been prepared.
Cash Flow Statement and Capital Projects
Cash Flow Statement and Capital Projects The cash flow statement is an important element of the comprehensive budget and is often overlooked in many organizations. The cash flow projection is often prepared in anticipation of major capital projects. In environments of increased risk taking related to managed care contracts, reliable cash flow projections have increasing importance.
Helps determine how much available cash there will be to pay off the deb
Cash Flow to Debt Ratio
Which of the following is NOT one of the main types of budgets within the operating budget? Statistical budget Revenue budget Expense budget Cash budget
Cash budget
Which of the following is NOT one of the main types of budgets within the operating budget? Statistical budget Revenue budget Expense budget Cash budget
Cash budget
This solvency indicator measures the number of days an organization could pay its cash operating expenses if none of the accounts receivable were collected. This liquidity indicator shows the minimal survival period of an organization.
Cash on Hand (days)
Control Activities.
Control Activities: Are the policies and procedures that help ensure management directives are implemented and necessary steps are taken to address barriers to achieving the control objectives. Occur across all levels and functions of the organization. Include a wide range of activities; for example, approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets, and segregating of duties.
A measure of the capital structure of the organization. This ratio is important in evaluating the financial risk position of an organization
Cushion Ratio
An indication of how long an organization can support operations with no inflows of cash
Days Cash on hand
Liquidity ratio important for crediting agencies
Days cash on hand
Ration that equals cash and marketable securities, again divided by one day's operating expenses.
Days cash on hand
Days cash on hand
Days cash on hand equals cash and marketable securities, again divided by one day's operating expenses. This indicates how long an organization can support operations with no additional inflow of cash from other current assets. This is viewed as a safety margin and should be high and above the m
Indicates how many days of revenue, net of bad debt expense, have not been collected. It is preferable for this ratio to be down and to be below the median.
Days in Accounts Receivables
Days in Patient accounts receivables
Days in patient accounts receivable is defined as net patient accounts receivable divided by net patient service revenue (net of bad debt expense) divided by 365 days. This indicates how many days of revenue, net of bad debt expense, have not been collected. It is preferable for this ratio to be down and to be below the median
Definition of Days in patient account receivables
Days in patient accounts receivable is defined as: (net patient accounts receivable) / ( net patient service revenue (net of bad debt expense) divided by 365 days.)
Agreements between a company and its creditors that the company should operate within certain limits; It states the limits or thresholds for certain financial ratios that the company may not breach.
Debt Covenant
All of the following methods represent effective approaches for medical groups to estimate future revenues, EXCEPT: Estimate of demand. Estimate of supply. Past activity. Estimate the number of procedures or patient visits.
Estimate of supply.
This measure goes beyond the operating margin to include all sources of income and expenses. Other sources of income besides those from patient care operations have become increasingly important to hospitals.
Excess Margin
Which section of the business plan includes a justification statement, brief history of the issue, a proposal statement, and one or two paragraphs outlining the benefits and cost of the plan?
Executive summary
accounts for the quantities and types of resources to be used to achieve the projected statistical volumes.
Expense Budget
Define Expense Budget
Expense Budget The expense budget accounts for the quantities and types of resources to be used to achieve the projected statistical volumes
Define Expense Budget: Supplies
Expense Budget: Supplies The expense budget also includes a compilation of supply and service budget amounts. This involves a listing of the various types or categories of supplies to be consumed and services to be utilized during the budget year, along with the dollar amounts to be expended for each category.
listing of the various types or categories of supplies to be consumed and services to be utilized during the budget year, along with the dollar amounts to be expended for each category.
Expense budget
Type of Equaity financing where financing by giving an ownership interest in the institution to the provider of funding.
External Equity Financing
extent to which debt is financed through your net fixed assets.
Fixed Asset Financing Ratio
Examples of Fixed Cost
Fixed Cost---These are costs that, in the short run, do not change with changes in volume. Examples include depreciation, long-term lease expense, or amortization of any incurred financing cost
Ratio that reflect how much revenue is generated by the fixed assets (property, plant, and equipment) of the healthcare facility.
Fixed asset turnover
Fixed assets financing ratio
Fixed assets financing ratio reflects the extent to which debt is financed through your net fixed assets.
Content of Support packages given to department heads to respond to variances in responsibility reports
For department heads to effectively respond to responsibility reporting and provide variance explanations, they need additional data. In addition to the financial information they are getting on their actual responsibility report from accounting or budgetary control, they should also receive some basic financial statements or detailed support schedules. These schedules should be prepared monthly and should also be sent to the department heads along with responsibility reporting documents. The content of such a support package should include the following: 1. Overall balance sheet for the institution 2. Statement of revenue and expenses 3. Capital expenditures as compared with the department and HCO budget 4. Supporting schedules (departmental revenue and expenses, key financial rations and trends for the department and HCO)
For the capital budget, there are generally a minimum of two components
For the capital budget, there are generally a minimum of two components 1. Strategic Capital 2. Maintenance Capital
4 Functions of Budget
Functions of Budget: 1. The budget also becomes a tool for monitoring performance against that plan. 2. The budget incorporates the strategic and operating plans for the organization, both in terms of the revenues and expenses, as well as the statistical volumes and resources associated with the plan. 3. It also provides a framework for setting priorities, securing and allocating resources efficiently, and controlling costs. 4. The budget summarizes a set of expectations integrating the impact of environmental factors and management decisions
Example of debt capacity test
If an organization has current long-term debt of $1 million and equity of $2 million, its debt-to-equity ratio is as follows: 1,000,000/2,000,000 = 0.50 As a general rule of thumb, a debt-to-equity ratio of 1.0 or less is acceptable. A ratio above 1.0 means the total amount of debt actually exceeds the total amount of equity or fund balance. For ratios above 1.0, lenders may increase their scrutiny and consider whether to continue to lend money to the organization.
Define Capital Lease
In a capital lease, all of the benefits and risks of ownership have been effectively transferred to the lessee, and the lessor recovers the full price of the equipment plus an interest factor during the lease period.
What is FTE?
In order to have meaningful and realistic labor budgets, the healthcare finance manager must understand the concept of full-time equivalent (FTE) personnel. An FTE is the equivalent of one full-time person who is paid for a set number of hours per year. An FTE can be one person who works all the hours, or two or more people who combine to work the equivalent hours. The FTE, in most cases as defined in health care, is one or more employees paid for a total of 2,080 hours in one year
Incremental budgeting
Incremental Budgeting Current volumes and statistics are adjusted only by the overall assumptions, unless there is a specific reason for change, such as the addition of a new piece of equipment or a new wing. Success of this approach relies on the manager's ability to isolate unusual or nonrecurring activities included in the historical period or anticipate environmental changes specific to the department. However, forecasting based on historical trends in a rapidly changing environment can be unreliable.
Information and Communications Involves: 5 things
Information and Communications Involves: 1. Identifying pertinent information, including internal operational, financial and compliance information, and information about external events relevant to decision making. 2. Communicating in a form and timeframe that enables members of the organization to perform their responsibilities. 3. Effective communication: down, across, and up the organization. 4. Ensuring that all personnel receive a clear message from top management that control responsibilities are to be taken seriously. 5. Ensuring that all personnel understand their role in the internal control system and how they should communicate significant information upward.
Type of equity financing where the retained earnings of the institution are used to finance the capital investment.
Internal Equity Financing
Overview of internal control
Internal control involves safeguarding assets and stewardship of resources. The internal control system is intertwined with the entity's operating activities and exists for fundamental business reasons. Internal control is most effective when controls are built into the entity's infrastructure and are an essential element of the enterprise. Management is ultimately responsible for an organization's system of internal controls.
Interrelationship of Budgets
Interrelationship of Budgets The operating budget, capital budget, and cash budget are highly interrelated. The operating plan impacts the capital budget, which in turn impacts the operating budgets. The operating budgets determine cash availability that in turn influences the capital budget. All three of the budgets should be prepared and validated before the annual budgets are adopted. This calendar should delineate each step involved in the process, establish time frames, and assign responsibility for each step. It is typical for an organization to require three to six months to complete this cycle.
Rate at which inventory is converted into revenue.
Inventory Turnover Ratio
Internal control archives which 3 objectives
It is designed to provide reasonable assurance regarding the achievement of the following objectives: 1. Effectiveness and efficiency of operations 2. Reliability of financial reporting 3. Compliance with applicable laws and regulations
A method of financing capital that provides for the payment and ownership of a capital asset as a contractual obligation executed over time, rather than at the time of possession. T
Leases
Methods of Projecting Statistics and Revenue Budgets: Define "Estimate of Demand"
Methods of Projecting Statistics and Revenue Budgets: Estimate of Demand The estimate of demand approach involves determining potential demand for the services of the group. It is a useful tool for planning marketing strategy, locating satellite offices, and initiating long-range planning. Because several estimates are involved, this method may have a high degree of error. It may, however, provide useful information for long-range planning and can be particularly important for the medical group providing prepaid care to patients who are members of an HMO.
Methods of Projecting Statistics and Revenue Budgets: Estimate the Number of Procedures or Patient Visits
Methods of Projecting Statistics and Revenue Budgets: Estimate the Number of Procedures or Patient Visits The number of procedures or patient visits can be estimated based on what is planned by each physician in the group during the budget period. By applying the expected fee schedule to the projection of procedures or visits, budget or production for each physician can be determined. Estimating the number of procedures is difficult for surgeons and other specialties, such as gastroenterologists, that perform non-invasive procedures. Estimating the number of patient visits is easier for primary care and general medical specialties
Methods of Projecting Statistics and Revenue Budgets: Past Activity The past activity method involves accurately anticipating expected changes. For physician practices as well as healthcare facilities, these include?
Methods of Projecting Statistics and Revenue Budgets: Past Activity The past activity method involves accurately anticipating expected changes. For physician practices as well as healthcare facilities, these include 1. Expected changes in hours of work. 2. Changes in the mix of procedures, including the addition of new procedures. 3. Changes in fee schedules. 4. Shifts in mix of payers that might occur if a health plan enters or leaves the service area. 5. New sites of service. 6. New local competition.
Methods represent effective approaches for medical groups to estimate future revenues,
Methods represent effective approaches for medical groups to estimate future revenues: 1. Estimate of Demand 2.Estimate of number of procedures 3. Past activity
Ratio Analysis & monitoring of debt covenant compliance
Monitoring debt covenant compliance is another use of ratio analysis. Most organizations with debt have debt covenants that require them to maintain certain financial ratios to remain in compliance. Therefore, on an on-going basis, organizations will be monitoring those covenants via ratio analysis.
Which type of evaluation technique takes into account the time value of money? Marginal benefit Payback method Net present value method Cumulative value method
Net present value
Capital Budget evaluation This method takes into account the time value of money: a dollar received in a future year is not worth as much as a dollar received today
Net present value method
All of the following are requirements for tax-exempt financing, EXCEPT: Organizations must qualify as a tax-exempt organization. Organization must restrict the use of funds to tax-exempt purposes. Proceeds cannot be used in any way directly benefiting an individual or for-profit organization. Organizations must have a debt-to-equity ratio of 1:1 or less.
No specific debt-to-equity ratio is necessary to obtain tax-exempt financing. The three requirements for obtaining tax-exempt financing are that the organization must qualify as a tax-exempt organization, the funds must be used only for tax-exempt purposes, and the proceeds cannot be used in any way that directly benefits an individual or for-profit organization. This statement is not true and is therefore
Once the responsibility reporting system is in place and department heads are receiving their monthly reports and analysis from accounting or budgetary control personnel, they should be required to explain and clarify significant variances by cause. Causes may be:
Once the responsibility reporting system is in place and department heads are receiving their monthly reports and analysis from accounting or budgetary control personnel, they should be required to explain and clarify significant variances by cause. Causes may be: 1.Volume Variances 2. Rate Variances 3. Price variances 4. Efficiency Variances
Objectives of the budgeting and reporting
One of the objectives of the budgeting and reporting process is to identify areas where corrective action may be appropriate. Specifically, management must determine that resources are being used as efficiently as possible.
Operating Budget
Operating Budget: The operating budget places responsibility for meeting budget targets on departmental managers, where greater direct control of resources resides. Department managers are responsible primarily for controlling expenses, but also, and to a lesser extent, for meeting revenue targets. It makes sense to place responsibility in the hands of those people who can directly influence the effectiveness and efficiency of a unit's operations. Operating budgets should be prepared on a departmental level, where variances from the budget highlight deviations requiring investigation, explanation, and impact evaluation. This allows management to manage by exception and focus only on those activities producing operating results that vary from plan to plan.
Operating Expenses and Revenues
Operating Expenses and Revenues Operating expenses and revenues are projected on an accrual basis similar to the basis on which financial statements are prepared. Presenting financial statements on an accrual basis is the standard when dealing with larger corporate and hospital-based practices. Smaller practices and divisions within larger entities may still find it helpful to budget on a modified cash basis. The advantage of modified cash is the ease of explaining the system to clinical operating managers and the simplicity of management controls inherent in preventing commitments for expenditures greater than available cash.
Capital financing method where aone in which the lessee is liable for the leasing cost for the term of the lease. Equipment and lease renewal options are determined by the fair market value of the equipment. The lessee does not have any ownership right during or after the leasing period
Operating Lease
This profitability indicator shows the income derived from patient care operations. Profitability indicators measure the extent to which the organization is using its financial and physical assets to generate a profit.
Operating Margin
Which type of control budget places the responsibility for meeting budget targets on departmental managers? Operating budget Capital budget Cash budget Control budget
Operating budget
Which type of control budget places the responsibility for meeting budget targets on departmental managers? Operating budget Capital budget Cash budget Control budget
Operating budget
Type of Profitability ratio concerned with the amount of profit that is generated from operations.
Operating margin
Capital Budget evaluation method permits a rough evaluation of a proposed expenditure for new equipment in terms of the length of time required for the equipment to pay for itself, i.e., to produce net cash inflow equal to the initial investment outlay.
Payback method
Physicians should be involved in estimating the number of patient visits. The number of patient visits can be estimated by gathering the following information:
Physicians should be involved in estimating the number of patient visits. The number of patient visits can be estimated by gathering the following information: 1. The number of days the group will be open during each month of the budget 2. Number of patients that physicians see for each month 3. Number of days that physician expects to work each month 4. The estimated number of patient visits per month
Price Variances--
Price Variances--- Price variances are variances in the price of a supply compared to that assumed in the budget.
a lender or group of lenders allows a borrower the use of a specified amount of money,
Principle amount on the loan
Productivity Measurement and Evaluation Because of the significance of labor expense for most healthcare organizations, it is also common for management to implement a separate labor productivity monitoring process. This process differs from the responsibility reporting mechanism in two ways:
Productivity Measurement and Evaluation Because of the significance of labor expense for most healthcare organizations, it is also common for management to implement a separate labor productivity monitoring process. This process differs from the responsibility reporting mechanism in two ways: 1. It is as close to "real time" as possible, with reports going out immediately following the payroll reporting cycle 2. It differentiates between fixed and variable cost centers and modifies labor targets based on actual volumes
Productivity Measurement and Evaluation
Productivity Measurement and Evaluation Each variable cost center will be assigned a primary workload statistic associated with an equivalent labor statistic. The labor statistic assigned is usually based on industry benchmarks that have been derived from high performing organizations. Each reporting period, the system reports "earned" labor hours, based on actual workload units incurred during the period, to actual labor hours. The reporting path is similar to responsibility reporting. Department managers explain variances to divisional leaders who report up to senior management. The effect is to encourage high efficiency standards throughout the organization. It is possible to implement similar reporting mechanisms for other high cost areas—for example, supplies expense. Most healthcare organizations calculate supplies expense per adjusted admission or other departmental statistic and compare their results with that of high performing organizations.
Productivity Measurement and Evaluation in Physician Practices
Productivity Measurement and Evaluation For physician practices, the use of ratio calculations and trending of data over time will facilitate monitoring the practice. Alternatively, the practice leadership can use published data from a variety of sources to establish benchmarks for the practice. Benchmarks provide a useful exercise for management to analyze performance and to set new goals for continuous improvement. Care must be taken to consider the comparability of external data sources to the practice.
What is used to assess whether an organization is meeting strategic goals and objectives?
Profitability ratios will help to assess whether an organization is meeting strategic goals and objectives.
Define Debt Service coverage
Prospective lenders are also looking for an organization's debt service coverage ability. Debt service coverage asks the question, how many times could the organization pay its principal and interest payments after paying operating expenses?
Ratio that indicates how quickly the assets may be converted to cash.
Quick Ratio
An indexing technique for relating work effort to output, in order to determine work load, measure productivity, or calculate procedure costs.
RVU
Rate Variances
Rate Variances--- Rate variances are variances between the budgeted rate and actual rate charged for a procedure.
variances between the budgeted rate and actual rate charged for a procedure.
Rate variance
Used to analyze historically what has occurred in a particular institution by taking specific financial measures and converting them into ratios. It also is a good measure of the present state of an organization's financial health
Ratio Analysis
Why is ratio analysis useful?
Ratio analysis is an indicator of past performance. It is used to analyze historically what has occurred in a particular institution by taking specific financial measures and converting them into ratios. It also is a good measure of the present state of an organization's financial health
Ratio analysis is used for the following 6 purposes:
Ratio analysis is used for the following purposes: 1. Summarization of financial data 2. Assessing short- and long-range financial plans 3. Assessing debt capacity 4. Monitoring debt covenant compliance 5. Pricing of services 6. Strategic analysis
Ratio analysis & strategic analysis.
Ratio analysis is useful in strategic analysis. When organizations conduct strategic planning activities, they assess their strengths, weaknesses, opportunities, and threats (SWOT). Leaders must consider the financial impact of each of these. Ratio analysis permits organizations to look at trends showing the effects of actions taken to address weaknesses, the impact of threats on the organization's fiscal and operating performance, and the success of its strengths and opportunities. The ratios used in strategic analysis often are applied against both the organization conducting the strategic planning and other organizations in the same region. Doing so, allows the organization to analyze its performance against the performance of its competitors.
Reports include information on statistics and revenues and expenses for each cost center or division. They should be sent to each department head and each supervising vice president for those areas that they directly supervise.
Responsibility reporting
Responsibility reports
Responsibility reports include information on statistics and revenues and expenses for each cost center or division. They should be sent to each department head and each supervising vice president for those areas that they directly supervise.
Type of Profitability ratio that measures the magnitude of earnings produced by an organization's equity base.
Return on Equity
Type of Profitability ratio that measures how effectively assets are working in generating profits for the entity
Return on Net assets
Revenue Budget
Revenue Budget The revenue budget is a straightforward set of calculations that determines the gross amounts to be generated by charging patients for the hospital's services. Units of service (from the statistical budget) X Appropriate charge rates (prices) = Gross revenue As an adjunct, budgets are prepared for contractual allowances, discounts to insurance companies and managed care organizations, uncompensated care, and bad debts (although bad debt is classified as an operating expense, it is commonly included on the revenue budget).
Revenue Budget for Medical Practices
Revenue Budget for Medical Practices For medical groups, the revenue budget requires a projection of income from all sources, including fee-for-service and managed care contracts. This also assumes a projection of the group's patient load under both payment sources. It should reflect environmental factors, such as changes in fee schedules and risk pools. It should also include the impact of leadership decisions, such as recruitment or staffing changes on capacity. The practice should consider the following measures of revenue: Net revenue per physician FTE (full-time equivalent) Net revenue per visit or procedure Net revenue per RVU (relative value unit)
Example of Semi-fixed cost
Semi-Fixed or Stepped variable---These are costs changing with volume, but not in direct proportion to the volume; rather, they follow a stair-step pattern. An example of this in a hospital setting would be salary cost in an acute staffing area: If you have a 20-bed acute area with an occupancy of five patients, you would not need any more staffing than you would for one patient. However, when the sixth patient is admitted to the service area, you would have to add an additional FTE; the additional FTE along with the previous staff could provide services for as many as ten occupants on that service level. Then, again, once you get to the eleventh occupant, you would have to add another FTE, and so forth.
Example of Semi-variable cost
Semi-variable----These are costs that vary in direct relation to volume after a minimal level of activity has been reached. An example of semi-variable cost behavior in healthcare organizations is the telephone expense, whereby a monthly access and service charge is paid initially, no matter what the volume is, and then each time a long distance or local phone call is made an additional charge is assessed.
Budget that includes the key units of service, such as new and established patient visits, procedures, ancillary exams, and other pertinent activitie
Statistic Budget
a forecast of the relevant activity level for each department. This defines the volume of business for the year ;summarizes historical and projected activity of the group.
Statistical Budget
Statistics Budget
Statistical Budget The statistical budget is a forecast of the relevant activity level for each department. This defines the volume of business for the year and is expressed in terms, such as patient days, admissions, visits, etc. Typically, the terms used to express units of service, or volume, are the same terms that are used for billing purposes. For medical groups, the statistical budget summarizes historical and projected activity of the group. Careful attention should be given to assessing the key driver of practice activity. In many practices, the key driver is new and established patient visits. In specialty practices, a key driver is often referrals. Special reports are developed to identify existing and new sources of referrals. Identifying sources of referrals is one of the most important environmental factor assessments that can be prepared by a medical practice.
Define Statistics Budget
Statistics The statistics budget includes the key units of service, such as new and established patient visits, procedures, ancillary exams, and other pertinent activities. The statistic may be measured as an absolute number, such as a count of procedures using specific Current Procedural Terminology (CPT) codes. Increasingly, activity is measured as a relative value unit in order to normalize the measure of resource use across a mix of visits and procedures.
Statistics: Relative Value Units (RVUs)
Statistics: Relative Value Units (RVUs) Relative Value Units (RVUs) is an indexing technique for relating work effort to output, in order to determine work load, measure productivity, or calculate procedure costs. For example, based on a sampling, it is determined that it takes two hours to do an appendectomy and three hours to do a cholecystectomy. If a 30-minute period is used to define OR time, the appendectomy would be the equivalent of 4 RVUs and the cholecystectomy, 6 RVUs. A circulating nurse who assists with two appendectomies and one cholecystectomy will have productivity of 14 RVUs out of a potential 16 RVUs (eight hours) of work, or productivity of 87.5%
Component of the capital budget in which Department managers with responsibility for implementing new programs or initiatives should also be involved in developing these capital requirements.
Strategic Capital
Components of expense budget?
The expense budget includes: 1. Labor. 2. Supplies. 3. Books/subscriptions. 4. Dues. 5. Education and travel expenses. 6. Maintenance contracts. 7. Telephones. 8. Other resources used in the department.
Define Strategic Capital-
Strategic Capital----Strategic capital involves the expansion of existing programs, the initiation of new programs and services, or both. Department managers with responsibility for implementing new programs or initiatives should also be involved in developing these capital requirements. It is the responsibility of senior management to prioritize and schedule capital expenditures (usually by quarter) and determine the aggregate capital budget, once all requests for maintenance and strategic capital have been identified.
Strategic Planning Process includes:
Strategic Planning Process includes: Identifying the organization's current position, including its mission, vision, and long-term goals. Conducting an internal and external assessment and comparing the organization's condition against those findings. This is often called a SWOT analysis.
Example of Debt service coverage
Suppose net profit after paying all operating expenses (excluding interest and depreciation) is $1.5 million. The annual principal plus interest payments equal $500,000. For this example, debt service coverage is as follows: 1,500,000/500,000 = 3 The higher this number, the more likely the organization will, under adverse conditions, be able to continue debt service payments.
The Resource-Based Relative Value Scale
The Resource-Based Relative Value Scale CMS has created a comprehensive reimbursement methodology for physician practices that incorporates several variables, including geographic location, office expense, time, and professional liability cost. This methodology is used to reimburse physicians through CMS. Each relative value unit is multiplied by a fiscal conversion factor to generate the reimbursement amount. The official name of the methodology is the resource-based relative value scale (RBRVS).
Current Ratio
The current ratio is the highest level. The current ratio is current assets over current liabilities. In general, the higher the number, the better, because it indicates sufficient current assets to satisfy current liabilities. From a financial management standpoint, however, many financial managers and CFOs would like to see that ratio lower, indicating the ability to keep their receivables and other current assets low and investing their cash more productively
Equity financing ratio
The equity financing ratio reflects the extent to which assets are funded through equity versus through debt The cash flow to total debt ratio is a key statistic used by many lending or crediting agencies. It helps determine how much available cash there will be to pay off the debt.
The first step in determining how much can be borrowed?
The first step in determining how much can be borrowed is to perform a debt capacity test. This evaluates the capacity for future borrowings. Debt capacity is determined by the debt-to-equity ratio of the borrower.
The long-term debt to equity ratio
The long-term debt to equity ratio is a statistic that is widely used by a variety of sources. A related term is equity to total capitalization. Instead of comparing debt to equity, you compare debt to equity plus debt. That is also known as the debt capitalization ratio. These are variations on the same numbers.
Define Reported Income iNdex
The reported income index is a measure of how much of the income in a current year is reflective of the change in net assets. The change in net assets should be due to net income, with the exception of restricted funds that are received from philanthropic activities. Restricted funds flow directly through the net assets and not through the income statement. The normal value for the reported income index will usually be 1. If it is less than 1, operations are being supported by significant external contributions.
The required payments of principal and interest for any given year are referred to as ?
The required payments of principal and interest for any given year are referred to as annual debt service.
There are three common capital budgeting evaluation techniques:
There are three common capital budgeting evaluation techniques: Payback method Net present value method Return on investment (ROI) method
There are three common capital budgeting evaluation techniques:
There are three common capital budgeting evaluation techniques: Payback method Net present value method Return on investment (ROI) method
Three components of the Cash Budget:
Three components of the Cash Budget: Total Cash Available--------In general, this is equal to the beginning cash balance, collections from patients and payers, proceeds from planned borrowings, proceeds from liquidated investments, and proceeds from dispositions of long-term assets. Total Cash Disbursements-------In general, this is equal to the cash outflow for operations (for purchases and other operations), outflows for long-term debt, scheduled principal and interest payments, and outflows for acquisition of long-term assets. Total Cash Needed-------In general, this is equal to the total disbursements and a minimum cash balance the organization wants to maintain as an operating reserve.
Ratio that quantifies how much income is generated to cover interest costs.
Times interest earned ratio
Times interest earned ratio
Times interest earned ratio quantifies how much income is generated to cover interest costs. Expanding on that, debt service coverage then quantifies how much income is generated to cover both principal and interest payments. Debt service coverage is also very much used by crediting and rating agencies and is generally a covenant in most financial debt documents
To maximize the benefits from budgeting as a control tool, many organizations have adopted flexible budgeting. Two approaches:?
To maximize the benefits from budgeting as a control tool, many organizations have adopted flexible budgeting. Two approaches: 1. Develop a series of fixed budgets prepared under various assumptions that would include the range of volumes that could reasonably be expected. Each department manager would re-evaluate each cost component (for example, labor, supplies, purchased services, etc.) given the various volume assumptions and their own knowledge of cost behaviors for their departments. 2. Develop cost standards for each cost component of the department's unit of service. The standard, multiplied by the actual volumes, becomes the flexible budget. The key to this approach for flexible budgeting is clearly in the reliability of the standards selected as well as the efficiency of the unit of service or volume statistic in predicting cost variation.
Ratio that reflects the effectiveness in generating revenue with the assets of the organization.
Total Asset Turnover
An indication of how long an organization can support operations with no inflows of cash is referred to as days cash on hand. Is this statement true or false? True False
True
The fact that a dollar received in a future year is not worth as much as a dollar today is the principle of net present value. Is this statement true or false?
True
Two key components of Capital Budget:
Two key components of Capital Budget: 1. Maintenance Capital 2. Strategic Capital
Two types of equity financing are available:
Two types of equity financing are available: Internal Equity Financing ---------Internal equity financing is by far the least expensive source of capital funds. Under internal equity financing, the retained earnings of the institution are used to finance the capital investment. Most organizations develop their operating budgets in tandem with their capital budgets to maximize their ability to finance capital acquisitions through internal equity. External Equity Financing External equity financing means financing by giving an ownership interest in the institution to the provider of funding. This is clearly distinguished from debt financing, where a certain principal sum will be borrowed and that sum will be paid back along with interest.
Types of Profitability Ratios
Types of Profitability Ratios: 1. Markup 2. Operating Margin 3. Contractual discount percentage 4. Reporting income index 5. Return on total assets 6. ROE
Volume Variances----
Volume Variances---- This determines the financial impact of a difference between the actual volume and the budget volume. For example, if your budget volume for a certain month was 10,000 procedures in the radiology department and the actual was only 8,000 procedures, your volume variance is 2,000 multiplied by whatever the price for the individual procedure might have been.
This determines the financial impact of a difference between the actual volume and the budget volume.
Volume variances
When issuing a rating on a specific organization, a ratings agency will consider the following areas:
When issuing a rating on a specific organization, a ratings agency will consider the following areas: 1. Financial factors 2. Management Capability 3. Medical Staff Characteristics 4. Provisions or the structure of financing 5. competitive environment or market position.(concern here is primarily the institution's resistance to economic change and its ability to adapt to technological change as well) 6. Financial factors
Which approach to budget development requires the departments to build projections for volumes, revenues, labor costs, and other operating expenses each year? Experience-based budgeting History-based budgeting Resource-based budgeting Zero-based budgeting
Zero-based budgeting
Formula for Debt to capitilization ratio
long-term debt ÷ (long-term debt + unrestricted fund balance)
Reporting The level of distribution for these monthly financial statements should coincide directly with the responsibility of the individual receiving them. What should be given to department heads?
the departmental revenue and expense and capital expenditure reports would not be sent to the board of directors or executive management. These would go directly, and only, to the department heads and possibly to middle management.
