Financial Management in Health - Assignment Example

Financial Management in Health Customer Insert His/Her Name Customer Insert Grades Course Customer Insert Tutors Name May 1, 2012. Outline 1. Question 1 2. Question 2 3. Question 3 4. Question 4 5. Question 5 6. Question 6 7. Question 7 8. Question 8 9. References Question 1 Organisations have a number of stakeholders who include; constituents like voluntary members of the association or business owners, employees, government and suppliers among others (The Open University, 2012). It is important to maintain good relationship with the government at all levels and keep them updated with the activities of the project and expected impacts. Support from government may be crucial to the organisation’s success and regular involvement with several public and regulatory authorities is normally needed for the success of the business. The government might have long-lasting relationship with the community affected by the project as well as other stakeholders that are involved in convening together and facilitating discussions between the stakeholders. The government may also partner with the organisation in provision of services and in communicating any information to the local people as well as combining development plans for the community with project’s operational needs (Ifc.org, nd). Business owner’s sets various objectives for the organisation, together with financial objectives that make them have solid plan which will enable the organization to move towards long-term success. There are several financial objectives such as; profit maximization, maximization of shareholders’ wealth, revenue growth and sustainability through retrenchment during hardships and payment of debts. The non-financial objectives include business ethics that is the organisation’s attitude towards shareholders in that it is required to treat them fairly and honestly (Ingram, 2012). Employee’s welfare is a vital objective; this is associated with issues like salaries and wages, favourable working environment, employees’ benefits, and recognition of efforts through promotions or pay increase. Thus, the organisation must attract and retain high quality workforce (Tutor2u.net, 2011). Suppliers are trading associates of the organisation. Large organisations normally have significant purchasing power over suppliers which must be utilized with care. Suppliers’ objectives may include payment timing and any other terms of doing business (Tutor2u.net, 2011). Question 2 Notes to financial statements offer additional and detailed information that explains information in the major financial statements such as income statement, cash flow and balance sheet (Businessaccent.com, 2009). Normally, information that may not be included in financial statements is reported in such notes. It is very boring to financial statement’s users to read these notes because they are detailed and are the longest section of the financial statements. But it is vital for the users like creditors, shareholders and investors to read financial statements notes. Such notes contain important information like the firm’s general information, financial statements preparation basis, stock option and pension plans information, accounting policies and main accounts breakdowns (Businessaccent.com, 2009). There are various accounting policies disclosed in the first note to financial statements mostly with a heading “Summary of Significant Accounting Policies”, which describe policies principal amounts reported in financial statements (Hanesbrands Inc, 2012). These summaries of important policies include consolidation if the company has subsidiaries, utilisation of estimates, translation of foreign currency, recognition of sales and incentives, coupons, discounts and rebates, volume-based incentives, inventory valuation, cash equivalents, property, valuation of accounts receivable, goodwill and other intangible assets, income taxes, stock-based compensation and financial instruments (Hanesbrands Inc, 2012). Question 3 Liquidity relates to cash as well as assets that can be converted easily with minimal costs while solvency is an organisation’s ability to meet its financial and debt obligations as they fall due. Liquidity is more concerned with how the business is going to pay its bills and it is measured using two financial ratios that include quick ratio and current ratio. Solvency ratios like debt ratio and debt/equity ratio measures the relationship between owners’ equity and debts and they also evaluate the percentage of debt being used by the organisation (Weakonomist, 2010). Solvency depends on the organisation’s earning power, thus the organisation has to earn profit in order to repay debt. A leveraged organisation exposes the organisation to interest rate charges, which chips in something to the instability of the earnings. Extreme debt might make it hard for the company to borrow finances at sensible rates in times of rigid money markets. Therefore, solvency and liquidity are terms that describe company’s ability to meet financial obligations or pay-off debts (Apexcpe.com, 2006). Question 4 Depreciation i). Straight line Depreciation = (Cost – salvage value) / Useful life Computer equipment = ($15,000 – $0) / 3 = $5,000 Equipment depreciation = $5,000 per year Billing Software = ($5,000 - $)/ 3 = $1,666.67 Billing Software depreciation = $1,666.67 per year ii). Reducing balance method Depreciation = Net Book Value x Depreciation rate Computer Equipment Opening Net Book Value Depreciation rate Depreciation Net Book Value Year 1 $15,000 54% $15000 x 54% = $8100 $15000-$8100 = $6900 Year 2 $6,900 54% $6900 x 54% = $3,726 $6,900 - $3,726 = $3,174 Year 3 $3,174 54% $3,174 x 54% = $1,713.96 $3,174 - $1,713.96 = $1,460.04 Billing Software Opening Net Book Value Depreciation rate Depreciation Opening Net Book Value Year 1 $5,000 54% $5,000 x 54% = $2,700 $5,000 - $2,700 = $2,300 Year 2 $2,300 54% $2,300 x 54% = $1,242 $2,300 - $1,242 = $1,058 Year 3 $1,058 54% $1,058 x 54% = $571.32 $1,058 - $571.32 = $486.68 Question 5 Cash Accounting Basis Income Statement For the period ending Mar-31 Apr-30 May-31 Operating revenues       Net Patient health care Service revenue $60,000 $250,000 $250,000       Operating Expenses       Salaries $50,000 $55,000 $45,000 Drugs supplies     $160,000 Phone bill     $1,000 Total Operating expenses $50,000 $55,000 $206,000 Net income $10,000 $195,000 $44,000 Accrual Accounting Basis Income Statement For the period ending Mar-31 Apr-30 May-31 Operating revenues     Net Patient health care Service revenue $310,000 $250,000 $200,000     Operating Expenses     Salaries $50,000 $55,000 $45,000 Drugs supplies   $35,000 $65,000 Phone bill $1,000   Total Operating expenses $51,000 $90,000 $110,000 Net income $259,000 $160,000 $90,000 Workings Net Patients health care services Mar-05 Accounts Receivable 60000 Mar-31 Income Statement 310000 Mar-10 Accounts Receivable 250000 310000   310000 Apr-30 Income Statement 250000 Apr-06 Accounts Receivable 250000 250000   250000 May-31 Income Statement 200000 May-15 Accounts Receivable 200000 200000   200000   Accounts Receivable Mar-05 Net Patients health care services 60000 Mar-15 Cash 60000 Mar-10 Net Patients health care services 250000 Mar-31 Balance c/d 250000 310000   310000 Apr-01 Balance b/d 250000 Apr-10 Cash 250000 Apr-06 Net Patients health care services 250000 Apr-30 Balance c/d 250000 500000   500000 May-01 Balance b/d 250000 May-05 Cash 250000 May-15 Net Patients health care services 200000 May-31 Balance c/d 200000 450000   450000 Cash Mar-15 Accounts Receivable 60000 Mar-30 Salaries 50000 Mar-31 Balance c/d 10000 60000   60000 Apr-01 Balance b/d 10000 Apr-30 Salaries 55000 Apr-10 Accounts Receivable 250000 Apr-30 Balance c/d 205000 260000   260000 May-01 Balance b/d 205000 May-01 Accrued Expenses 1000 May-06 Accounts Receivable 250000 May-05 Accounts Payable 160000 May-30 Salaries 45000 May-31 Balance c/d 249000 455000   455000 Salaries Mar-30 Cash 50000 Mar-31 Income statement 50000 50000   50000 Apr-30 Cash 55000 Apr-30 Income statement 55000 55000   55000 May-30 Cash 45000 May-31 Income statement 45000 45000 45000 Phone Bills Apr-07 Accrued expenses 1000 Mar-31 Income Statement 1000 1000   1000   Accrued Expenses Mar-31 Balance c/d 1000 Mar-31 Phone Bills 1000 1000   1000 May-01 Cash 1000 Apr-01 Balance b/d 1000   Drug Supplies Apr-01 Accounts Payable 160000 Apr-30 Income Statements 160000 160000   160000 Accounts Payable Apr-30 Balance c/d 160000 Apr-01 Drugs Supplies 160000 160000   160000 May-05 Cash 160000 May-01 Balance b/d 160000 160000   160000   Question 6 Ratios are valuable indicators of company’s performance as well as financial situation. Ratios are calculated from information reported in financial statements and they are classified into five categories; liquidity, profitability, gearing/leverage, investors/ evaluation and activity/efficiency ratios. They are normally used to compare and quantify the relationship between financial variables in income statement and balance sheet. A single ratio in itself is not useful for analysis and will need to be compared with various standards such as industry’s ratios, past financial statements’ ratios, competitors’ ratios and projected statements ratios (NetMBA, 2010). Question 7 a). Primary Health Care Limited core business is to provide services to many professionals of the health care who offer complete care to the patients. In addition, Primary Health Care manages licensed as well as credited day surgery services, automated pathology laboratory and specialist eye clinic (Primary Health Care Limited, 2012). b). Financial ratios Ratios 2011 2010 Short Term Solvency Current ratio     Current assets/ current liabilities =226362/177978 = 1.27 =206561/174761 = 1.18 Acid Test Ratio     (Current assets - consumables - other financial assets - income tax receivable) =(226362- 25611-798)/177978 = 1.12 =(206561-24304-1500-5218)/174761 = 1.00         Long-term solvency Gearing ratio     Total debt/ capital employed =1321265/(2504389+1143287) = 36.22% =1226016/(2470237+1051255) = 34.82%         Financial Progress Percentage change in income     (Year's income - Previous year's income)/ previous year's income x 100 = (79763-134153)/134153 = -40.54% =(134153- 110705)/110705 = 21.18% Operating (profit) margin     Operating income/ Revenue = 245755/1322094 = 18.59% =258105/1296658 = 19.91% Interest cover     (EBIT+ Depreciation+ Amortisation)/ Interest charges =(245755+60968+ 21228)/87875 = 3.73 =(258105+55016+ 17901)/67835 = 4.88 Dividend cover     EPS/ DPS =15.8/(3+5) = 1.98 =27.8/(15+10) = 1.11         Combined ratios Return on capital employed (ROCE)     Operating profit/ Capital employed =245755/(1143287+ 2504389) = 6.74% =258105/(2470237+ 1051255) = 7.33% (Fixed) Asset Utilisation ratio     Revenue/ Total Assets =1322094/3825654 = 0.346 =1296658/3696253 = 0.351       Source: Primary Health Care Limited, 2011. Primary Health Care Ltd’s liquidity as measured by current ratio and acid test ratio indicate an increase in liquidity position from the year 2010 to year 2011. The increase in acid test ratio as compared with increase in current ratio indicates that the organisation held less of other financial assets and income tax receivable in 2011 compared to 2010. Therefore, the organisation was able to meet its short-term obligations on time as both ratios were more or equal to one. Leverage as measured by gearing ratio indicates that the organisation financial risks increased in 2011 compared with 2010 as shown by the increase in the ratio from 34.82% in 2010 to 36.22% in 2011. However, the organisation was not highly geared because the ratio was not more than 50%, implying that the shareholders’ equity was higher than total debts. Financial progress as measured by percentage change in income indicates that the organisation’s profitability in 2011 reduced by -40.54% from $134,153,000 while in 2010 the income changed by 21.84% from $110,705,000 in 2009. Operating profit margin indicates that organisation’s profitability reduced in 2011 from 19.91% in 2010 to 18.59% in 2011. This implies that the organisation was not able to control cost of revenue and operating expenses. In 2011 earnings available for interest payment covered the interest charges 3.73 times while in 2010 interest charges were covered 4.88 times. The reduction in interest cover in 2011 was as a result of increase in operating expenses which reduced revenue earned by the organisation. In 2011 dividends were covered 1.98 times by earnings attributable to equity shareholders. The increase in 2011 implied that the organisation may sustain paying dividends in the future, if this trend continues. But in real sense the increase in dividend cover was as a result of decrease in amounts of dividend paid. ROCE indicates that the firm was less efficient in utilisation of the long-term funds to generate returns to the shareholders as shown by the decrease in ratio from 7.33% in 2010 to 6.74% in 2011. In 2011 and 2010 the organisation generated $0.346 and $0.351 of sales from every dollar invested in assets. This means that there was a reduction in asset utilisation’s efficiency in 2011. c). Primary Health Care Ltd’s Stock is not an attractive stock to me as an investor because the organisation’s efficiency and profitability have taken a downward trend. Similarly, the organisation has increased its financial risks implying that if it continues to add more debt in the future debt-holders will have control over the firm and if I am to buy the share I want to have control over the organisation as a shareholder. In addition the organisation reduced its dividend payments in 2011implying that this trend may continue in future and as a potential investor, I am looking for a stock that will be able to maximize my returns and not to minimize returns. Thus, if I become shareholder in this organisation I will only rely on capital gains in order to maximize my returns which will make me a speculator and not a long-term investor. Question 8 Blackmores enhances lives of the people by delivering solutions of natural health, turning out to be people’s first selection in healthcare. It does this by converting knowledge and unrivalled heritage into the best healthcare solutions through innovation (Blackmores, 2011). a).   2011 2010 Inventory days     No. of days in a year/ Inventory Turnover =365/(78790/((23749+22555)/2)) = 107.25 days =365/ (80151/((22555+16000)/2)) = 87.79 days Days Receivables     No. of days in a year x Average debtors/ credit sales =(365* ((43030+33994)/2))/235428 = 59.71 days =(365 * ((36494+38000)/2)) /216234 = 62.87 days Days Payable     No. of days in a year x Average creditors/ credit purchases =(365* ((10051+11054)/2))/69920 = 55.09 days =(365 * ((11054+ 9000)/2))/65748 = 55.66 days The organisation was less efficient in 2011 as it took more days to convert its inventory into sales compared with 2010. The organisation’s credit policy is becoming more efficient as depicted by a shorter average collection period in 2011 of 59.71 days compared with 62.87 days in 2010. In 2011and 2010 the organisation was allowed 55.09 and 55.66 days, respectively, the implication of this is that organisation had less cash in 2011 to meet short-term obligations and also the suppliers were less confident in the organisation and were not willing to wait for long to be paid their dues. b). Cash operating cycle   2011 2010 Days Receivables 59.71 62.87 Inventory days 107.25 87.79 less Days Payable (55.09) (55.66) Working capital cycle (days) 111.87 95 In 2011and 2011 it took organisation 111.87 and 95 days, respectively, to finance its working capital, that is time lag between converting raw materials into stock, then stock into cash, paying the creditors and receiving from debtors. c). Working capital decisions relate to amount of liquid assets to be held by the organisation at any one particular time. The more the current assets in the organisation the more liquid it is and the less likely for it to be declared insolvent. This decision involve the management of working capital of the organisation that is cash, inventory, accounts receivables and accounts payables. The decision requires a trade-off between profitability and liquidity risk if current assets are not invested in income generating venture, the organisation’s profitability will be affected, and sound techniques of managing current assets should be applied to ensure that the organisation is optimal in both profitability and liquidity (Baker and Powell, 2005). References Apexcpe.com. (2006). Analysis and uses of financial statements. Delta Publishing Company: Los Alamitos. Retrieved from http://www.apexcpe.com/publications/171016.pdf Baker, H. K. and Powell, G. E. (2005). Working Capital Management. Blackwell Publishing Ltd: Carlton. Blackmores. (2011). Investors centre: Annual Report 2011. Retrieved from http://www.blackmores.com.au/about-blackmores/investors- centre/~/media/Files/About%20Blackmores%20Investor%20Centre/Annual%2 0Report%202011%20V2.ashx Businessaccent.com. (2009). The importance and uses of notes to the financial statements. Retrieved from http://businessaccent.com/2009/02/04/the- importance-and-uses-of-notes-to-the-financial-statements/ Hanesbrands Inc. (2012). Investors: 2010 Annual Report. Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=200600&p=irol-faq Ifc.org. (nd). Stakeholder Identification and Analysis. Retrieved from http://www1.ifc.org/wps/wcm/connect/b720b30048855a0584e4d66a6515bb18 /PartOne_StakeholderIdentification.pdf?MOD=AJPERES&CACHEID=b720b3 0048855a0584e4d66a6515bb18 Ingram, D. (2012). Financial Business Objectives. Retrieved from http://smallbusiness.chron.com/financial-business-objectives-4072.html NetMBA. (2010). Financial Ratios. Retrieved from http://www.netmba.com/finance/financial/ratios/ Primary Health Care Limited. (2011). Investors: Annual report 2011. Retrieved from http://www.primaryhealthcare.com.au/IRM/Company/ShowPage.aspx/PDFs/1 889-17483548/AnnualReport2011 Primary Health Care Limited. (2012). About us. Retrieved from http://www.primaryhealthcare.com.au/IRM/content/home.html The Open University. (2012). The relationship between stakeholders and the organisation. Retrieved from http://openlearn.open.ac.uk/mod/oucontent/view.php?id=397369§ion=1.2 Tutor2u.net. (2011). Non-financial objectives of a business. Retrieved from http://tutor2u.net/business/accounts/valuation_nonfinancial_objectives.htm Weakonomist. (2010). Liquidity Vs. Solvency. Retrieved from http://weakonomics.com/2010/05/20/liquidity-vs-solvency/ Read More