Financial Management for Health Managers

Dr. Amjad Idries

Outlines

1. Introduction to financial management (FM) for

health managers

2. Management accounting

3. Importance and principals for pricing decisions in

health care

4. Financial accounting

5. Financial control & information systems

Why it is important for you to know?

• To see the bigger picture !!!

• Not to be seated, as a manager, on faraway side when financial issues were being discussed

• Sometimes your advisory role, most likely on organization’s board, require you to understand these issues.

Key questions all will face1. Would we be able to expand mother and child

health services by 10% with available funds?2. At which level should user fees be set?3. Can we afford to open a new trauma department

and hire the required staff?4. What is the rate of return on the capital

investment of equipping and building a new health centre?

5. Why has the health centre incurred a loss of $500,000 and what measures should be taken to improve financial performance in the next year?

New public management and health sector reforms related to FM

1. Reorganizing the public sector into more

autonomous corporatized units.

2. Introduction of market elements with contract-

based competitive provision.

3. Cooperation with the private sector and

privatization.

New public management and health sector reforms related to FM

4. Private-sector styles of management

practice.

5. Explicit use of measurable standards and

measures of performance.

6. Greater emphasis on outcomes.

Choose one offer for a bid on vaccination

• Offer 1: $ 3000 for 6000 vaccinations

• Offer 2: $ 4000 for 8800 vaccinations

• Offer 3: $ 6000 for 9000 vaccinations

Economic selection

Effective selection

Efficient selection

Value of money

What are the functions of any Finance Department?

1. Financial accounting: provides summaries for external users and regulatory bodies.

2. Management accounts: provide financial information internally to managers to help in managing the organizations.

3. Cash management: ensuring the organization has enough money to meet its obligations.

What is the difference between:

Management accounting v.s financial accounting

What is the difference between:

Economic cost v.s. financial cost

Management Accounting

• It provides information for performance

monitoring.

• It combines information on inputs and process

(financial + activity).

Cost measured because:

(1) stocks and assets valuation;

(2) decision making;

(3) control; cost behaviour (variable, fixed, semi-

variable, stepped);

(4) to calculate the flexible budget you need

total cost at different activity levels;

Pricing Decisions in Health Care• In private sector: affected by the market forces

(demand and supply) and competition, discrimination is wide;

• In public sector: it depends on certain principles and purchase policy as it involve 3rd party payment,

• Internal pricing: inter the organization between the departments to increase the cost consciousness and efficiency used to justify the price each unit charged internal (and external) and for budgets requests.

Question mark Star

Dog Cash cow

Market growth

Market share

Boston Group Matrix for Market Mix:

Market Mix

(1)Price: depend on quality, place and accessibility;

(2)Product: refer to product kind, the market will

response to quality, quantity and diversity. This

generally follow Boston Group matrix;

Market Mix

(3)Place: accessibility, competition, response to

consumers’ needs, equity of access,

contradicted with efficiency;

(4)Promotion: public awareness, confidence,

acceptance;

Question mark Star

Dog Cash cow

Market growth

Market share

Boston Group Matrix:

Approaches to pricing policies and costing:• Absorption costing: recover the full cost based on the average cost,

overhead cost is apportioned, problem is in contractions activity must be the same as agreed,

• Marginal costing: recover on the variable cost, problematic if the large part is fixed cost,

• Target pricing: adding mark-ups, common in private sector, but in public the providers given incentives above that to keep the cost less than planned,

• Penetrating pricing: recovering the marginal cost, lead to maximizing the services demand, used in cost-leadership strategy to maximize the growth, problem in recovering the fixed cost,

• Price skimming: deliberately setting high process in monopoly situation,

Introduction to financial accounting

Why accounting system:

(1) ensure all financial transactions were conducted accurately,

(2) provide comprehensive records to compile income and expenditures,

(3) used to produce accounts and reports,

Double entry system

• Basic concept, there are two basic sides of any transaction (stock and cash OR debit and credit);

• It reflect the source and uses of each transaction, assets is something used in running the work (organization’s uses),

Double entry system

• While liability is how assets were funded (sources), capital is fund of owners, assets = capital + liabilities (basic in double entry system);

• To ensure accuracy; debit should be equal to credit, this given in the trail balance,

Income statement:• It give summary of income and expenditure

(transactions) over the report period,

Balance sheet:• It shows assets, liabilities and capital,

snapshot,

Both are historic statements,

The Income Statement

• It shows the income and expenditure or cost relating to activities;

• Mainly consist of operating income, operating expenses, overheads in addition to interest, tax and dividends;

• To survive, the entity should have income equal (or exceed) the expenditures;

Depreciation:

• Applied to fixed assets that bought but not for resale;

• It is the indication of fixed assets’ value diminution;

• In case of intangible assets it is called amortization;

• Useful economic life is the period over which the asset

will have some economic benefits;

• Residual value: is the value of the asset at the end of

economic life, and the net book value: is the original cost

of the asset minus the accumulated depreciation

The Balance Sheet • It is a statement showing assets (fixed & current), liabilities

(current) and capital (resources) at a particular time;

• It helps in looking for past performance and help in setting performance targets after adjustment;

• The concept of entity is applicable (clear in dealing with the liabilities);

• It is different from income statement as this summarizing the income and expenditure over a period of time – while this is reflects the status at particular time

Cash Flow Statement

Cash flow is due to:

(1) initial capitalization,(2) capital program,(3) purchase (resale) of stocks and supplies,(4) sale of goods or services

Working Capital Management

WC = current assets – current liabilities

working capital cycle

Importance of its Management:(1) no cash creditors withhold;

(2) no cash no staff payment;

(3) no staff and no stocks there will be no enough goods or services (less income),

(4) all of these lead to reduction of cash level (continue),

It is important to ensure enough WC to pay creditors through the monitoring of stocks, debtors, creditors, accruals and other

Interpreting Financial Statement

Financial position:• Used to assess the health organization and its

ability to meet the short-term obligations, known as solvency ratios,

Interpreting Financial StatementWorking capital ratio:• Know as current ratio, compare the current

assets (cash and short-tem assets) with (/) the current liabilities (payable in the near future),

• Recommended as 2:1 to survive but it depends on the kind of activities and when it is 1:1 there is concern about the ability,

• Compare it at different time period (different BSs) for trend analysis whether declining or increasing,

Liquidity Ration:

• known as acid-test ratio, also for short-term purposes, similar to the above but it exclude the stock from the current assets, it is more critical than the above as it consider the effect of the stock in hand on the cash flow,

Financial and Management Reporting

Types are:

(1) strategic: (planning, market analysis, customer relations, evaluation);

(2) operational: (control, liquidity monitoring, return monitoring), using variance analysis;

(3) financial audit reports