Finance for the Non-Finance Manager

December 6, 2018
Presented by:
Angie Caldwell, CPA, MBA
Principal, PYA
Emily Smithson, CPA
Manager, PYA
Finance for the Non-Finance Manager

Bios
Emily prepares and reviews tax returns
for corporations, partnerships, trusts,
individuals, and tax-exempt entities.
Her primary area of expertise is compliance
and reporting of tax-exempt organizations,
with a focus on hospitals and hospital
systems.
She also has gained a wealth of experience
developing the income tax provision and
internal controls of a multi-national, publicly
traded company.
Emily J. Smithson
CPA
Manager, PYA
Angela E. Caldwell
CPA, MBA
Principal, PYA
Angie consults with physician practices and
healthcare systems in the areas of fair market
value compensation, contract compliance,
and commercial reasonableness.
She advises clients relative to
physician/hospital economic alignment
models and assists physician practices with
strategic, financial, and operational issues.
Angie also provides a full range of auditing
and review services for various entities,
including hospitals, health systems, health
insurance companies, community mental
health centers, employee benefit plans,
and not-for-profit organizations.

Objectives of this Course
Understand the basic
principles of financial
accounting and
reporting
Read and interpret
financial statements
Analyze financial
statement information
for operational
decision-making
Understand the
budgeting process

Overview
 Accounting information
 Must be relevant and
reliable to be effective
 Transactions provide
information and are
recorded in the company’s
accounts
 All accounting information
and financial statements
relate to each other.
 Objective of financial
reporting
 To provide useful information
to help make decisions.
 Investors and management
may use this information to
assess health of the
company.

Basic Principles of Accounting
 Measurement Principle
 Historical Cost – Generally Accepted Accounting Principles
(GAAP) require many assets and liabilities to be reported on the
basis of acquisition price because it is thought to be verifiable.
 An asset is a resource or property owned or controlled by a company
(e.g., Cash, Medical Equipment).
 A liability is an obligation of any money or service a company owes to
another party (e.g., Accounts Payable).
 Fair Market Value – Its use is increasing in certain industries
because it is a more market-based way to measure.
 Fair market value is an estimate of the price that a willing and
knowledgeable buyer would pay to a willing and knowledgeable seller.

Basic Principles
of Accounting (cont.)
 Revenue Recognition Principle
 Recognize revenue in the accounting period in which the revenue
is earned.
 Revenue will be recorded on the income statement when the
service is actually provided to the customer regardless of when
the payment is actually received.
 Expense Recognition Principle
 Recognize expenses in the same period as the revenues to which
they relate are recorded.

Basic Principles
of Accounting (cont.)
 Full Disclosure Principle
 Companies should strive to disclose matters that make a
difference to users, while taking sufficient consideration to make
information understandable, keeping in mind costs of preparing
and using it.
 Requires companies to provide necessary information so that
readers of the financial statements can make informed decisions.
 Who are the typical users of financial statements?
 Board of Directors
 Executives of the organization
 Banks and other lenders
 Investors
 Patients and other members of the community

Financial Statements
 Balance Sheet
 Shows a snapshot of the financial position of a company as of a
specific point in time.
 Assets = Liabilities + Net Assets
 Current/Noncurrent/Fixed assets are based on how quickly an asset
converts to cash.
 Current Assets are resources expected to be converted into cash within
one year. Fixed assets are long-term assets like Buildings and Equipment.
 Current/Long-term liabilities are based on due dates.
 Current Liabilities are obligations due by the company within 1 year,
whereas long-term liabilities have a due date greater than 1 year.
 Net assets now include:
 Net Assets without Donor Restrictions.
 Net Assets with Donor Restrictions.

Financial Statements (cont.)
 Balance Sheet (cont.)
 Limitations :
 Most assets and liabilities are reported at historical cost.
 Companies use judgments and estimates.
 Companies omit many items that are of financial value, but the
company cannot record objectively (e.g., knowledge and skill of
workers).

 Assets to Define:
 Assets limited as to use – These are otherwise liquid assets that are
designated for a specific purpose.
 Under indenture agreement – The use of these assets are restricted
by creditors (usually banks).
 Under self-insurance agreements – For companies that self-insure
their health plans and medical malpractice, assets that are restricted
to payments for claims.
 Board designated assets – Assets that the Board sets aside to meet
the financial obligation of a specified purpose (e.g., capital
expenditures).
 Goodwill – Results from acquiring other entities and frequently
related to non-quantifiable intangibles, such as value of brand
name.

 Liabilities to Define:
 Estimated third-party settlements – Typically this is payment from
Medicare, Medicaid, and private insurance companies.
 Deferred compensation – The liability to pay future compensation
to certain employees (e.g., certain retirement plans).
 Fair value of interest rate swap – The change in value of an
investment related to interest rates.
 Pension liability – Similar to deferred compensation, it is the
liability to pay pension payments to employees in the future.

Net assets under the newest pronouncements are reported
as Net Assets without Donor Restrictions and Net Assets
with Donor Restrictions.

 Statement of Operations and Changes in Net Assets
 Shows financial performance over a specific time period, usually
a year but can be monthly or quarterly.
 Investors and creditors use this to :
 Evaluate the past performance of a company.
 Provide a basis for predicting future performance.
 Help assess the risk or uncertainty of achieving future cash flows.
 Limitations :
 Companies omit items that they cannot measure reliably.
 Income numbers are affected by the accounting methods employed.
 Income measurement involves judgment.

 Revenue and Expenses to Define:
 Patient service revenue – Revenue received from Medicare or
insurance, and also from self-pay patients.
 Contractual adjustments – All medical providers report gross
charges and then reduce them by the contractual allowance,
which is negotiated with each insurance provider.
 Estimated provision for bad debts – The amount of patient
service revenue that is not expected to be received.
 Gain/loss on refunding long term debt – The most common
results from tax-exempt bonds that are paid off early.
 Unrealized gains or losses – The increase or decrease in the
value of investments.

 Statement of Cash Flows
 Reports the company’s
inflows and outflows of
cash during a given period
of time.
 Captures both the current
operating results and the
changes in the items of the
balance sheet.
 The statement is broken
down into three categories
to show cash flows from
Operating, Investing, and
Financing activities.
 Statement of Net Assets
 Reports changes in Net
Assets during a specific
period of time.
 Net Assets are the assets
of the organization
reduced by the liabilities.
 In a for-profit entity,
dividends paid to
investors would reduce
net assets.

Quiz
Categorize the following accounts as to whether they
belong on the Balance Sheet or Statement of Operations:
ACCOUNTS BALANCE SHEET STATEMENT OF OPS
An MRI machine
Accounts payable
Salaries expense
Interest income
Buildings
Gain on sale of office furniture
Tax exempt bonds
Cash payments from Medicare
Prepaid rent
Donations to the Hospital

Financial Statement Analysis
 Net Income
 Shown on a company’s
Statement of Operations and
Changes in Net Assets and
can be found by subtracting
a company’s expenses from
revenue.
 Key tool to interpret the value
and profitability of a company.
 Can be used to compare a
company’s performance to a
competitor’s performance.
 Summarizes past
performance and should be a
predictor of future cash flows.
 Quality of Earnings
 Earnings can include lots of
estimates prepared by
management.
 High quality means reported
net income corresponds to
true, economic net income.
 Low quality could be
inadvertent, or due to
manipulation (e.g., Enron
scandal).

Financial Statement
Analysis (cont.)
 Balance Sheet
 Shows how much a company owns and how much it owes.
 How much a company owns as a whole can be found by looking
at the Asset section, and how much a company owes is found in
the Liability section.
 Important metrics include Cash, Leases, Property Plant and
Equipment, Bond Liabilities, Accounts Receivable, Accounts
Payable, Mortgages, and Notes Payable.
 It is important to have a good ratio of assets to liabilities.

Quiz
Compare the two companies:
Company A Company B
Cash 10,000 145,000
Accounts Receivable 250,000 5,000
PP&E 15,000 15,000
Total Assets 275,000 165,000
Accounts Payable 215,000 30,000
Note Payable 100,000 100,000
Total Liabilities 315,000 130,000
 Which company is in a better financial position based on only the data above?
 Why?

Quiz
Compare the two companies:
Company A Company B
Patient Revenues 170,000 115,000
Bad Debts 50,000 10,000
Operating Expense 95,000 95,000
Net Operating Income 25,000 10,000
 Which company is in a better financial position based on only the data above?
 Why?
 What could the lesser company do to improve its financial position?

Quiz
Hospital, Inc. Financial Data
Cash 75,000
Accounts Receivable 150,000
Assets Limited as To Use 15,000
Total Assets 240,000
Accounts Payable 80,000
Accrued Sales Tax 10,000
Accrued Payroll 5,000
Total Liabilities 95,000
Patient Service Revenue 500,000
Bad Debts 140,000
Salaries 100,000
Sales Tax 10,000
Net Operating Income 250,000
What are some areas of concern
for this company based on these
financial numbers?
What are some areas that appear
strong for this company?
Are there any suggestions we
can make to this company to
improve its financial situation?

Budget Analysis
 Budgets forecast a company’s future financial position.
 Companies use budgets to see and understand where
money should be spent and how much can be allocated to
each project.
 Helps the management of a company determine if
operations are efficient.
 Master budget is a comprehensive layout for the
company’s plans.
 Operating budget – plans future earnings and projects an income
statement.
 Financial budget – plans the financing of assets and projects a
balance sheet.
 Capital budget – plans the purchase of fixed assets over a period
of time.

Budget Analysis (cont.)
 Types of Costs
1) Fixed Costs: costs that
do not change with the
amount of services a
company produces.
 e.g., Lease Payments
2) Variable Costs: costs
that fluctuate as a
company produces
more or fewer services.
 e.g., Supplies
3) Operating Costs:
expenses of everyday
business activities but
not traced back to one
specific product; can
be variable or fixed.
 e.g., Salary Expenses
4) Direct Costs: expenses
directly associated with
producing a product or
service.
 e.g., Physician compensation

Budget Analysis (cont.)

The Purpose of a Budget
 Once the budget is created, that is only the first step in a
constantly shifting process.
 Many organizations review and adjust their budgets
monthly, often using a rolling 12 months.
 The most frequent use of a budget is to analyze and
review patient revenues and operating expenses.
 Comparing budgeted amount to actual revenues and
expenses incurred helps to highlight areas that need to
change.
 A well-prepared and carefully analyzed budget is a
powerful tool to improve financial results and track goals.

Analyzing the Budget Process
 Things to look for:
 Are revenues on track to meet budgeted revenue?
 Are operating expenses significantly higher or lower than expected?
 Are there explanations for deviations from the budgets?
 Are the department heads given access to review the budget for
their departments?
 Which departments are included in the budget preparation process?
 Are department heads allowed to revise the budget?
 Do department heads have the authority to make operational
changes that can impact the budget?

Quiz
Hospital, Inc. 2018 Budget
Patient Revenues 800,000
Parking Revenues 50,000
Pharmacy Revenues 100,000
Salaries Expense 250,000 10,000 95,000
Supplies Expense 150,000 20,000
Property Taxes 15,000 2,000
Utilities Expense 30,000 1,000
Holiday Parties & Meals 5,000 1,000
Budgeted Operating Income 350,000 38,000 (17,000)
What are some areas where Hospital, Inc. could improve this budget? Suggest
specific changes that could improve the financial condition of this organization.

Discussion Points
 Have you reviewed your organization’s financial statements
and budget?
 Is your organization tax-exempt? How are financial
decisions different between a for-profit hospital and a
tax-exempt hospital?
 What should be each manager’s role in the budgeting
process?
 If there is a financial detail that is not favorable, should all
parties be informed about it or should they not all be
informed?
 Have you had an experience where you were able to
positively impact the budget or your organization?

Summary
Every member of a healthcare organization has a
stake in the financial health of the organization
Understanding the financial data helps the Board,
the employees, the patients, and the community
understand the financial strength of a hospital or
healthcare organization
Knowledge is power!

PYA, P.C.
800.270.9629 | www.pyapc.com
Thank you!
Angela E. Caldwell, CPA, MBA
Principal, PYA
acaldwell@pyapc.com
(865) 684-2728
Emily J. Smithson, CPA
Manager, PYA
esmithson@pyapc.com
(800) 270-9629

Finance for the Non-Finance Manager

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