Finance management

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Finance management

Why do we discuss? Introduction and

Objectives

Basic finance literacy

Budgeting

Accounting ,Cost Accounting and Cost

Containment

Investments

Some general tips on day to day matters

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Why should we discuss?

Profession vs. Business

Every medical practice, small or big, is a business

Huge investments – expected returns

An entrepreneur- by default

Profit - a dirty word?

Survival and growth

Self employed - look after your own finances and control them

Problems: doctors tend to be ignorant & careless about finances, sitting ducks, frauds

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Objectives

To create awareness

To stimulate to further learning

To develop a vision

To develop an ability to plan and control with clinical

precision

To equip our selves to ask right questions to CA

To develop a healthy practice with patients as

beneficiaries

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Financial management – definition

It is the art and science of managing money

The most essential requirement of any organized

business or activity

The process of procuring and judicious use of

resources with a view to maximize the value of the

firm

Interdependence with other areas of management

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Basic finance literacy

1. Income and expenditure statement

2. Cash flow: outgoing, incoming

3. Balance sheet: final accounting item (what the

practice is worth)

4. Budgeting: a process of estimation of income and

expenditure

5. Assets

6. Liabilities

7. Capital

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Balance Sheet

A statement of assets, liabilities and capital on a given date

Assets:

Fixed: land, building, equipments etc

Current: Cash in hand or in bank, stocks, debtors

Liabilities

Long term: Loans > 1 yr

Current/ short term: overdraft, taxes

Capital= Assets -Liabilities

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Some core issues

Budget

Accounting

Cost Accounting

Break even point

Cost benefit analysis

Cost reductions and containment

Day to day activities

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Budget

An important instrument of the financial management

used as aid in planning, programming and control

A budget may be defined as a financial and quantitative

statement, prepared and approved prior to defined

period of time, of the policy to be pursued during that

period for the purpose of achieving the given objective.

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Budget: advantages

It is a tool for -

a) Quantitative expression of the planning

b) Evaluation of financial performance in accordance

with plans

c) Controlling costs

d) Optimizing the use of resources

e) Directing the total efforts in to the most profitable

channels

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Planning & preparing budget

Well in advance

An opportunity to plan expansion or

improving services , hence involve staff

and all departments

Plans must be realistic

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Types of budget

Importance :Understanding of various types of

budget can indirectly help us understand

various methods of finance management

1. Project budget : probable expenditure and likely

revenue for a specific project

2. Departmental budget

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Types of budget

3. Operating revenue budget- related to volume of work anticipated

4. Operating expenditure budget: recurring expenditures for operation and maintenance of services e.g. salaries and wages, supplies, support utilities, maintenance

5. Capital budget ( non recurrent ): meant for growth ( new facilities), replacement of obsolete. Needs are many – prioritize

6. Cash budget : provision for anticipated cash expenditures , for planning the cash flow e.g. salaries, bills etc.

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Accounting

An art of recording , classifying and summarizing

data in a significant manner and interpreting the

results

Data may be in form of money transactions and

events which are, in part at least , of a financial

character

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Types of accounting

1. Financial accounting: documentation of facts,

daily transactions

2. Cost accounting : expenditure for a particular

service

3. Management accounting : Analysis and

interpretation of financial information for

management purpose

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Nomenclature

a) Costing: to find out money spent on a service

b) Cost center: an allied group of activities in a hospital

eg laboratory, immunization, laundry service

c) Cost object: anything for which separate

measurement of cost is desired e.g. rooms, OT, ICU,

equipment

d) Cost unit: a measurable detail of service rendered

e.g. linen, laboratory investigation

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Categories of expenditures

Important in understanding dynamics of costing

1. Capital Vs Recurring

2. Fixed Vs Variable

Fixed : Remains unchanged despite changes in related

level or volume of activity e.g. salary of permanent

staff

Variable – volume dependent, varies in proportion to

changes in level of activity e.g. medicines,

consumables, power cost

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3.Direct vs indirect expenditures

Direct : Clearly linked to a service

Indirect: can not be clearly linked to a

particular cost object e.g. administration

cost,security cost

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Objectives & advantages of costing

1. To get clear picture of financial situation

2. Identifying profitable and non profitable

segments and taking action accordingly

3. To decide pricing of services and discounts

4. To decide for out sourcing of services

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Advantages of costing

5. Helps in entering into agreements with

TPA, corporate clients etc

6. Helps in identifying wastages

7. Helps in budgeting, planning

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Effective cost accounting

1. Proper records

2. Proper segmentation of costs

3. Sound accounting practices,regularity

4. Record of utilization of equipments

5. Record and analysis of man power

utilization

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Difficulties in cost accounting

1. Many inputs have to be considered e.g. labor,

material, depreciation,

2. Every transaction has to carry a price tag

3. Variation in quality of service e.g. consultant to

consultant, patient to patient

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Break - even analysis

Volume of activity at which total income just

equals total variable and fixed costs

Lower break even point is more desirable e.g.

bed occupancy 60% Vs 80%

Advantages: Equipment selection and purchase

decision, formulating price policy

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Cost - benefit analysis

An economic technique and formalized

way of comparing the cost and benefit of

undertaking an activity / project

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Expenditure - containment and cost -

cutting Sound economic sense

It does not mean compromising quality

1. Promote awareness amongst staff

2. Practice cost monitoring: analyze actual expenditure

against budget and standards , find reasons for

variations, work on them

3. Cost management: establish systems with

responsibility and accountability

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4.Strategies for expenditure control

a) Decrease the cost of inputs relative to outputs:

materials, man power

b) Increase output relative to input: scheduling of

procedures, automation , remove bottle - neck

in the flow of services

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5.Cost saving areas

a) Streamlining of services e.g. laboratory, OT, indoor

b) Purchases : planning, budgeting, bargaining, group

purchasing

c) Preventive maintenance AMC’s, back ups

d) Planning stage: quality manpower and machines,

planned recruitment, up gradation

e) Good accounting practices: automation, internal

audit

f) Energy audit

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Investments

We work hard to make money, but learn to make

your money work for you

Daily wage earners

Save, invest, build wealth, spend, give it away

Invest some percentage in improving services,

facilities

Stagnation without growth

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Personal investments

Required for future expansion and growth

Commitment to the financial needs of the family

Retirement planning

Building wealth.

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Various investment avenues

1. Real Estate

2. Gold and Jewellery

3. Government

Securities

4. Company Deposits

5. Mutual Funds

6. Equity

7. ULIP

8. Bank & company

FDs

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Some tips on day to day activities

1.Accounting

a) Financial memory of practice

b) Matter of self discipline

c) Meticulous record of financial transactions - legal

requirement e.g. Form 3c

d) Employ accountant - good documentation and

reports generation

2. Computerization

3. Periodic meetings with CA

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4. Handling cash

Staff handles lot of cash

Doctors are too busy to supervise

Easy temptation

Introduce checks and balances - ensure strict

cash control

Cash collection at counter (many advantages )

Minimize temptation for staff

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Tips

5. Deposit cash in bank daily or twice weekly

6. Have 2 distinct streams of cash flow

Cash inflow deposit daily

Cash outflow by withdrawal

7. Make schedule for making payments

8. Documentation support for all payments

9. Filing system: cash memos, paid bills, pending bills

10. Get personally involved for big transactions

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Tips

11. Reconcile bank statements

12. Do not allow anyone to take records home

13. To your staff, demonstrate your awareness

about what is going on and that you are careful

about money

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14.Handling search and seizure

a) Keep your cool

b) Call your best friends as witnesses

c) Know your rights

d) Prevention is better than cure

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Thanks