Introduction
- Financial analysis relies on accurate data
- This information is too complex to be useful
- It is organized into simpler financial statements
- They can be analyzed to judge business performance
Principal Financial Statements
- Statement of operations
- Balance sheet
- Statement of cash flows
- Statement of changes in net assets
Statement of Operations
- Lists the income and expenses
- Only discusses operations related to the processes of the organization
- Used to judge the overall performance of the organization
Useful Statement of Income
Metrics
- Net profit
- Profit margin
- Earnings per share
- Times interest earned
Statement of Operations Issues
- Does not distinguish between cash and other methods of payment
- Potential for misrepresentation
- Fraudulent increase in perceived profitability
Balance Sheet
- Describes the organization’s current financial position
- Lists its resources (assets) as well as outstanding claims (liabilities)
- Examples of assets are cash and equipment
- Examples of liabilities are short-term debt and yet unpaid taxes
- The difference between the two is called shareholders’ equity
Useful Balance Sheet Metrics
- Current ratio
- Quick ratio
- Working capital
- Debt-to-equity ratio
Balance Sheet Issues
- Some assets are challenging to value
- Can be used to conceal theft
- Potential for misrepresentation
Statement of Cash Flows
- Demonstrates the flow of cash in and out of the company
- Only discusses cash, not equivalents
- Reports the current ability of the company to make payments
Useful Statement of Cash Flows
Metrics
- Free cash flow
- Current liability coverage
- Cash flow coverage
Statement of Cash Flows Issues
- Prone to mistakes
- Outstanding account manipulation
- Miscategorization of cash flows
Statement of Changes in Net Assets
- Describes the changes in the net assets of the organization
- Used to clarify items that may not be apparent from the statement of operations
- Often required for not-for-profit healthcare organizations
Useful Statement of Changes in
Net Assets Metrics
- No frequently used ratios
- Net asset change is similar to net profit
- Positive changes are indicative of satisfactory management
Statement of Changes in Net Assets Issues
- Similar issues apply as with the balance sheet
- Organizations may aim to inflate their assets to appear viable
- The purpose of doing so would be to avoid scrutiny and attract donors
Financial Analysis Elements
- Used to formulate future strategy
- Performed by the accounting department in conjunction with top management
- Relies on financial statements
The Six-Step Financial Analysis
Framework
- Industry Analysis
- Firm Strategy Analysis
- Accounting Quality Analysis
- Financials Review
- Forecasting
- Valuation
Industry and Firm Strategy Analyses
- The industry analysis considers competition
- The firm strategy analysis discusses competitive advantages
- They have to be significant and sustainable
Accounting Quality Analysis and Financials Review
- It is vital to consider the potential mistakes and issues in the financial statements
- Once quality is verified, the review can begin
- Ratios and analysis measures can be used to understand specific performance determinants
Forecasting and Valuation
- Project future performance
- Adjust planning based on the results
- Value estimations may not be required for a not-for-profit
Conclusion
- There are four essential financial statements for a not-for-profit healthcare enterprise
- They should be used for financial strategy formulation together
- Their formulation is a step in financial analysis, which is a convoluted process
References
Baginski, S. P., Wahlen, J. M., & Bradshaw, M. (2017). Financial reporting, financial statement analysis and valuation (9th ed.). Boston, MA: Cengage Learning.
Cleverley, W. O., & Cleverley, J. O. (2017). Essentials of healthcare finance (8th ed.). Burlington, MA: Jones & Bartlett Learning.
Klammer, T. (2018). Statement of cash flows: Preparation, presentation, and use. Hoboken, NJ: Wiley.
Reeve, J. M., Duchac, J., & Warren, C. S. (2016). Financial & managerial accounting (14th ed.). Boston, MA: Cengage Learning.
Smith, D. L., Calabrese, D. T. D., & Finkler, S. A. (2018). Financial management for public, health, and not-for-profit organizations (6th ed.). Thousand Oaks, CA: SAGE Publications.
Vona, L. W. (2017). Fraud data analytics methodology: The fraud scenario approach to uncovering fraud in core business systems. Hoboken, NJ: Wiley.
Wahlen, J. M., Jones, J. P., & Pagach, D. (2016). Intermediate accounting: reporting and analysis (2nd ed.). Boston, MA: Cengage Learning.