Moreno Medical Center's Ratio and Budget Management | Free Essay Example

Moreno Medical Center’s Ratio and Budget Management

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Topic: Health & Medicine
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Moreno Medical Center had faced challenges in managing its operations during 2013. It could be noted from the organization’s monthly income statement that it generated an operating loss for consecutive five months from April to August 2013. The CFO Report referred to this situation as seasonal fluctuations that the company experienced during 2013 (Moreno Medical Center – Annual Report 2013, 2013). Moreover, it reported a net profit of $627,000 at the year-end. It is useful to analyze the organization’s past performance by performing financial analysis that would highlight the potential weaknesses in its strategies (Moreno Medical Center – Annual Report 2013, 2013).

The current report presents results of financial ratio analysis by using key financial ratios including current ratio, quick ratio, operating income margin ratio, and return on assets. The company’s performance is evaluated by comparing values of key ratios with the industry averages. It is useful to assess whether the selected company has effective strategies to compete with other companies in the same industry (Fridson & Alvarez, 2011) Furthermore, the report includes findings of budget management analysis.

Financial Ratio Analysis

The financial ratio analysis is a key tool that is commonly used by analysts and shareholders to assess a company’s financial performance. However, a key limitation of financial ratio analysis is that it is based on the company’s past performance that may not be appropriate for predicting its future performance. There are four ratios selected to analyze the financial performance of Moreno Medical Center. The values of key financial ratios are also compared with the industry averages.

Current Ratio

The current ratio is a key ratio that is used for ascertaining the company’s liquidity position. It is calculated by “dividing current assets of the company by its current liabilities” (Peterson & Fabozzi, 1999). It is important that the company has sufficient liquidity to fulfill its short-term business requirements. The following table indicates the values of the current ratio of the organization for 2012 and 2013.

2013 2012 Industry Average
Current Ratio Current Assets / Current Liabilities 127,867 / 23,807 130,026 / 8,380 2.0 (Ellison, 2015)
5.37 15.52

Table 1: Current Ratio.

The company’s annual report indicated that its current assets decreased by 1.7% and its current liabilities increased by 184.1% in 2013. It could be inferred that the company’s liquidity position weakened in 2013. However, the value of current ratio remained more than the benchmark value of one. The company had current assets of $5.37 for each $1 of current liabilities (Moreno Medical Center – Annual Report 2013, 2013). It was unlikely to face financial problems in the short-term. However, the significant decline in the value of current ratio reflected that the company could experience liquidity issues in the future. The industry average was 2.0 (Ellison, 2015) that indicated that the company performed better than other companies in the industry. The significant increase in the company’s liabilities was due to its external debt and the slow down in the payable settlement. The external debt was obtained by the company at an adjustable interest rate for the purchase of new equipment.

Quick Ratio

The quick ratio that is calculated by excluding the value of inventories from current assets is another measure of liquidity (Peterson & Fabozzi, 1999).

2013 2012 Industry Average
Quick Ratio (Current Assets – Inventories) / Current Liabilities (127,867 -18,396) / 23,807 (130,026 – 8,370) / 8,380 N/A
4.60 14.52

Table 2: Quick Ratio.

The values in the table provided above indicated that the company’s liquidity position weakened in 2013. The analysis showed that the company’s inventories almost doubled in 2013. It implied that the company was ineffective in managing its inventories of medical supplies. The industry average was not available.

Operating Income Margin Ratio

The operating income margin ratio is a key indicator of the performance of health centers. The company’s operating profit is divided by its total revenues to determine the value of operating income margin ratio (Fridson & Alvarez, 2011).

2013 Industry Average
Operating income Margin Ratio Operating Profit / Total Revenues 689 / 462,982 2.6% (Ellison, 2015)
0.1488%

Table 3: Operating Income Margin Ratio.

The result indicated that the company’s operating income margin value was very low. The company’s income statement indicated that the company incurred an operating loss in five consecutive months. The industry average was 2.6% (Ellison, 2015). It suggested that the company performed poorly as compared to other companies in the industry. The company’s low profitability could be a major concern for its shareholders, and it could undermine the company’s ability to generate positive cash flows in the future.

Return on Assets (ROA)

The return on assets is calculated by dividing net income of the company by its total revenues (Khan, 2004).

2013 Industry Average
Return on Assets Net Income / Total Assets 627 / 587,767 4.5% (Ellison, 2015)
0.11%

Table 4: Return on Assets.

The low value of return on assets indicated that the company had poor profitability in 2013. It was a major weakness of the company, and it should take steps that could help it improve its financial position. The industry average was 4.5% (Ellison, 2015) that Moreno Medical Center had major problems that affected its profitability in 2013.

Budget Management Analysis

The variance analysis is performed by comparing the projected income statement with the interim income statement of the company. The variation analysis is useful to evaluate the company’s performance by comparing the actual results with the budgeted amounts (Weygandt, Kimmel, & Kieso, 2009).

2013
(Projection)
2013 Actual Variation F / UF
Revenues
Net Patient Revenue $447,805 $459,900 3% F
Other Revenue $3,225 $3,082 -4% UF
Total Revenues $451,030 $462,982 3% F
Expenses
Salaries and benefits $220,553 $220,752 0% UF
Supplies $73,487 $74,584 1% UF
Physician and professional fees $110,277 $110,376 0% UF
Utilities $1,222 $1,200 -2% F
Other $1,838 $1,840 0% UF
Depreciation & Amortization (“non-cash” expenses) $29,946 $36,036 20% UF
Interest $3,705 $3,708 0% UF
Provision for doubtful accounts $14,721 $13,797 -6% F
Total Expenses $455,749 $462,293 1% UF
Operating Income ($4,719) $689 115% F
Non-operating Income (Loss)
Investment Income $304 ($62) -120% UF
Net Income ($4,416) $627 114% F

Table 5: Variance Analysis.

The variance analysis indicated there was a favorable variation in the net patient revenue and total revenues of the company Moreno Medical Center – Annual Report 2013, 2013). On the other hand, it could be noted that the company’s total expenses had an unfavorable variation Moreno Medical Center – Annual Report 2013, 2013). The favorable variation in the company’s total revenues resulted in operating income instead of operating loss. Moreover, there was a favorable variation in the company’s net income. The company can overcome unfavorable variations by managing its expenses efficiently. It could be noted that the depreciation charge for 2013 was 20% higher than 2012. It was due to the purchase of new equipment by the company. The company could reduce the depreciation charge by changing the depreciation method or estimated useful life of assets.

Benchmarking improves budget management as it allows the management to set targets and make their strategies for achieving those targets. For example, if the management decides to increase its revenues by 5%, then it can make strategies that would achieve this target.

Conclusion

The analysis concludes that Moreno Medical Center had strong liquidity in 2013. However, there was a significant decline in the values of the two liquidity ratios in 2013. The company’s profitability remained very low in 2013. The budget variance analysis indicated that the company performed better to achieve higher revenues that resulted in net income instead of net loss as projected by the company’s management.

Reference List

Ellison, A. (2015). 200 hospital benchmarks. Web.

Fridson, S., & Alvarez, F. (2011). Financial statement analysis: A practitioner’s guide. Danvers, MA: John Wiley & Sons.

Khan, M. Y. (2004). Financial management: text, problems and cases. New Delhi: Tata McGraw-Hill Education.

Moreno medical center – annual report 2013. (2013). Web.

Peterson, ‎P., & Fabozzi, F. J. (1999). Analysis of financial statements. Hoboken, NJ: John Wiley & Sons.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerial accounting: Tools for business decision making. New Jersey, NY: John WIley & Sons.