Financial Management System of Health Care

Organization:

American Health Care Association

Student Name: __________________

Submitted to: __________________

University: __________________

INTRODUCTION:

American Health Care Association is a healthcare organization affiliated with health department

of United States of America and is abbreviated as AHCA. It provides 11,000 non-profit and

profit nursing facility, living facility and there are people who assist the organization, ultimately

support one million such people who cannot work (disabled).

AHCA was established in 1949 and the head office is in Washington D.C AHCA also has its

sub-departments and National Center for Assisted Living is one of these.

It works as a public organization and provides its services to the Congress and Federal

Government. Other healthcare facility providers can also provide services to the people along

with AHCA after getting membership.

AHCA also has its weekly newspaper named as Capitol Connection and a magazine known as

Provider. The breaking news about healthcare industry and legislation development or

regulations news of concerned industry are the main contents of the newspaper and magazine.

AHCA also provides professional skills, learning, teaching and networking chances. AHCA also
developed their advancing Excellence in America’s Nursing Homes campaign for better care

quality services.

PROCESS TO PLAN FINANCIAL ACTIVITIES:

In American Health Care Association, the decision making is actually based upon the financial

position. The management at all level must have awareness about the financial matters of the

healthcare organization. In the process of planning the financial activities of AHCA, it is

necessary to keep in view the pricing and servicing decisions, financial ratio analysis,

forecasting, time value analysis, cost of capital, breakeven analysis etc. Simply, all the basic

aspects to manage the organization financially are included in it.

To plan the organization financially, revise the stage of strategic planning at the time of

establishment of organization. It is not a hard thing to develop understanding with the financial

process of AHCA. All the financial records of the organization are in access of everyone, so it is

a reliable organization and people trust it for donation. The budgeting is another important

element of financial planning, in which managers decide about the coming incomes and

expenditures of organization.

In order to develop the operational plan, no restriction for time period. But it is more likely to

have a long term planning and American Health Care Association has a long term plan and

goals. The planning in the initial years is really a difficult or complicated task to achieve. The

plan or roadmap developed by the organization must be followed by all the stakeholders of the

organization. Looking at the sensitivity of the health sector, AHCA must plan carefully in

providing services.
The main focus of the financial planning is on amount of capital, investment and funds available.

The other part of financial planning is to develop the budget which is helpful in making decision

about the requirements of capital investment.

The next step in financial planning is to have a rip on the working capital needs for covering the

day to day needs of the organization. In reality, this is the portion including the

budgeting decisions for formulation and presentation of standards which managers are

determined to achieve all the year.

DECISION MAKING:

Decision Related to Servicing:

In American Health Care Association, compensations in case of public and self managed

healthcare plans are stated by the insurance companies. That is the reason why the service

managers are not taking part in the decision making, is enough to presume the risks related with

provision of services to the covered populations. All this is concerned with service decision

making.

The function of finance is that of a blood in human body. The importance of finance is evaluated

from the provision of services to the patients and it also maximizes the effectiveness of the

human resources. There are two broad functions of financial management, which are:

1. Functions of accounting management

2. Functions of financial management

The functions of accounting management in AHCA are directed by the highest authority called

chief financial officer. Normally, financial activities include:

 Financial Planning and Budgeting:

In American Health Care Association, the financial planning and assessment all kinds of

resources is the first stage of actual operations. The significance of budget is reflected in

financial planning process.

 Financial Reporting:

The financial reporting is an important activity of financial managers of healthcare in AHCA

because it is used to publicize the financial record of organization.

 Capital Investment Decisions:

Management from low to high level are involved in decision making process like decisions

about capital budgeting associated to land, building and equipment. These are the decisions

that made AHCA, a flourishing healthcare organization.

 Financing Decisions:

In order to provide disciplined services to the people, management must take in time decision

for raising the capital for buying complicated and expensive machinery.

 Management of Working Capital:

Working capital mainly leads to the short term capital needs. American Health Care

Association has to make in time decisions so that the operational effectiveness is ensured and

to serve properly.

 Contract Management:

The financial management system is effective as to monitor the things carefully and helpful

in negotiations and signing of an agreement with third party. The financial management must

decide carefully because wrong decision may lead them to organizational failure.
HEALTHCARE SERVICES:

The term healthcare finance is very broad and wide in all respects. The first step for examining

the healthcare finance, containing a variety of services provided by certain industries, which are:

 Health Services:

The services like health checkup, physical fitness check by physician, hospitals, attention

homes and rehabilitation centers are included n the health services provided by AHCA.

 Health Insurance:

The role of insurance in the healthcare industry is significant. This industry involves the

public and private both which proposes these services.

 Managed Care Centers:

In healthcare industry, American Health Care Association is popular in providing the health

and insurance facilities to the people. The organization for health maintenance is also

included in it.

 Medical Equipment and Supplies:

Medical Equipment and Supplies include the industry, supplying the medical equipment to

the health care centers and other such organization. This medical equipment includes x-ray

machines, ultra sound technology, wheel chair, surgical instruments etc.

 Pharmaceuticals And Biotechnological Material:

Pharmaceutical and biotechnological material industry is involved in manufacturing the

medicines, surgical items and therapeutic products.

Decisions Related to Pricing:

The pricing is one of the most important issues in all businesses. It is great challenge for

financial management to set the appropriate price of any product or services. The price of

product includes both cost and profit margin. Another important factor to focus on is the

profitability and discount issue. For example, the suppliers of the health accessories must decide

about the prices that the business recommend. The discounts offered must also be considered in

managing and decision making process. This is known as decision making related to the pricing.

In AHCA, the price setting is given much importance. The matters related to the pricing issue are

managed by the financial management.

After proper study of both the decision analyses, similarities on certain issues are found in both

service decision analysis and price decision analysis, therefore these two categories are likely to

be discussed in combination. The costs of material, labor and factory overheads then marketing

and selling expenses applied on product also has its impacts on services decision making. This

will affect the financial standing of AHCA. The arrangement of two decision making approaches

are also supportive in shaping the purposeful mode of the healthcare business of AHCA.

Price Location Strategies:

When suppliers are involved in the price setting, then there is a possibility that management of

AHCA is also busy in price setting. Therefore different kinds of strategies are used by managers

in different situations. We have two kinds of price setting strategies.

Full Cost Pricing:

In case of full cost price setting strategy, total cost of the product and services is bear by

organization. The condition of the patient doesn’t matter at all. It will be helpful to stay viable in

the long run. It may also include the following factors of provision of services:

1. Direct Fixed Cost

2. Direct Variable Cost

3. Suitable Division

Marginal Cost Pricing:

When in a particular situation, it is ordered to manufacture additional units or provide extra or

additional services then the strategy made in such a situation is called marginal cost pricing. E.g.,

suppose a hospital of AHCA is providing a facility of 40,000 patient days of care. The increase

in patients as an output will be the point to actually make the decision.

TIME VALUE ANALYSIS:

The cash flow statement is used to measure the fiscal value of all assets such as financial assets

(stock and bonds etc.) and actual assets (indicative machinery, surgical clinics etc.). Actually, the

concept of time value states that a money received in future has no worth than the amount of

money today have, which can be invested in business to make it more worthy than a dollar. This

is why; the time changing in cash flow is reported in financial management system.

The study to find and analyze the cash value of money after a particular time is called time value

analysis or discounted cash flow analysis. The contribution of this analysis in financial

management of American Healthcare Association is very vital. To develop a fair understanding,

we need comprehensive elaboration of it.

For Example, American Healthcare Association initially have a balance of $1000 and 6% rate of

interest.

The very first thing to do in this respect is the creation of a timeline to easily visualize the flow

of cash.

0______1_______2______3_______4

Rate of Interest = 6%,

Years = n = 4

Timeline contains time periods or years and there may be rows and columns. The time period

starts from 0 and 1 is the end of first period, at 2, two time periods will be completed and so on.

The representation of starting and ending of time period is shown by numbers on the timeline.

Additionally, the time value analysis may also be used for finding the flow of cash for AHCA. A

4 year timeline is used for illustration.

0______1_______2_______3_______4
 Initial Amount= -$1000

Rate of Interest= 6%

At the start of the timeline, the amount of money is $1000 and rate of interest is 6% but at 3 the

value is unidentified. The negative sign with $1000 is representing the outflow of cash. (-) sign is

vital to obtain the correct solution. In addition, it is required for business calculators and

spreadsheet roles that this sign must be attached to cash flows for analysis. We can go for

illustrations in time value concept, when we have full information of it. The usage of timelines is

to understand the time value analysis or to solve complicated numerical problems.

The following points must be considered to understand the concept:

 The balance at the start is $1000 at time period 0. The (-) sign is outflow of cash.

 At the time period 1, the earnings of AHCA is $1000×0.06= $60, so the first year balance

of AHCA will be $1000+60= $1060.

 At period 2 on timeline, the balance will become $1060 + ($1060×0.60) = $1060 + $63.6

= $1123.6 after applying the interest rate. The earnings of 2nd year are more than that of

1st year.

 In the same way, process carry on till at the end of timeline and earning per year also

increase gradually year by year.

 The total amount of earnings after four years will be $262.48 and the total balance will be

$1262.48 after 4 years or at the end of timeline.

FINANCIAL RATIOS ANALYSIS:

The financial ratio analysis is used to measure the fiscal and financial performance of any

organization. We can analyze the current situation of AHCA using the ratio analysis for the
purpose to determining the future financial considerations and requirements of the organization

because these are the only tools, used for this purpose. The financial ratio analysis is used to:

 Make contrast of yearly financial records

 Match the balances with other health care organizations

 Disclose the propensity in the evolution of direct and indirect operational expenses

 Familiarity of the propensity in the maturity of various kinds of earnings

 Estimation of output (gain or loss).

The concept of financial ratio analysis is very wide and it has certain monitory and fiscal benefits

like increasing the understanding and stability of equipment.

The money is used as raw material by financial managers in American healthcare association.

This is dependent on, in which category the services provided lie. We need to pay interest in the

bank, distribution of profit and recovery of loans. The amount for payment can be obtained from

surplus and other profits. The surplus funds are created with the efficiency of administration and

financial management.

Financial ratio analysis depends upon two basic ratios, which are:

 Return on Assets (ROA) ratio

 Return on equity (ROE) ratio

In order to measure the performance of the AHCA using ratios analysis, we can go with the

example as follows:

1. Suppose the financial position of AHCA is:

Operating Surplus = MU 8,741

Net Total Assets = MU 136,741

 Shareholder’s Fund = MU 50,000

Interest Payable = MU 2,000

Tax Payable = MU 0

2. Calculation of ROA or return on Asset:

ROA = Operational surplus x 100% = 8,741 x 100% = 6.39%

Total assets = 136,741

3. Calculation of ROE or return on equity:

ROE = Operational result minus interest payable to lenders and tax payable to tax

authorities x 100%

Equity (owners’/shareholders’ fund)

= 8,741 - 2,000 x 100% = 13.48%

4. Conclusion:

From the above ratios we concluded that the AHCA is performing very well financially,

so it will attract the investors and donators to further invest and ultimately the business

will expand.

BREAKEVEN ANALYSIS OF “AHCA”:

To understand the breakeven analysis, it is important to understand the breakeven point. It is

stated that the breakeven is a point where the cost applied and profit are equal. Remember this

term is mostly used in cost accounting. To analyze the situation as whole is called breakeven

analysis.
It can also be used in case of conjunctions with breakeven volume in an accounting profit

analysis. In the profit analysis of AHCA, different sorts of breakeven points can be pointed out.

Now to have complete understanding, we mat elaborate it with the help of examples or numerical

figures. There is a project for MRI project in AHCA. For this purpose, we consider accumulated

cash flow, is simply the addition of all cash flows that have taken place till that point. The figures

for cash flow for the year ‘0’ is -$3,000,000; at year ‘1’ it will be -$3,000,000+$540,000=

-$2,460,000; at year ‘2’it will be -$3,000,000+$540,000+$585,000 = -1,875,000; and so on.

Breakeven Analysis for American Healthcare Organization:

Years Annual Cash Flows Cumulative Cash Flows

0 (3,000,000) (3,000,000)

1 540,000 (2,460,000)

2 585,000 (1,875,000)

3 602,500 (1,272,500)

4 730,850 (541,650)

5 1,105,600 563,950
In the extreme right, the investments amount of $3,000,000 will be recovered after year ‘5’, if

forecasting about cash flow is true. Moreover, in case flow of cash is assumed to advance equally

during the year, breakeven will happen to be $301,836 / $1,369,908=0.22 years into Year 5, so

the MRI project recovery is 4.2 years. At the very start, recovery was used by financial managers

as an estimation tool of finance in project analysis.

Beside this, recovery of investment amount may also be helpful in capital investment analysis.

The minimum the recovery, the more rapidly the funds are invested in MRI project in AHCA,

will become reachable for the reason and therefore the more liquid the task.

Conclusion:

With the help of above analyses, we concluded that growth and development of healthcare

organization is totally dependent on financial management system. Keeping in view the

sensitivity of organization, financial and economical implications are important to understand.

Be careful while making decisions otherwise it may lead to failure. So we need to have

awareness about the financial information. Therefore, it is necessary for any healthcare

organization to be familiar with accounting in a world where healthcare environment is unstable.

References:

 Allen, R. J. 1989. “Proper Planning Reduces Risk in New Technology

Acquisitions.”Healthcare Financial Management (December): 48–56.

 Bergman, J. T.,and B. J.McIntyre. 1989. “Valuation Analysis.” Topics in Health

Care Financing (Summer): 32–40.

 Cardamone,M.A.,M.Shaver,andR.Worthman.2004.“BusinessPlanni ng:

R e a s o n s , definitions, and Elements.” Healthcare Financial Management (April): 40–

46.

 Clark, J. J. 2005. “Improving Hospital Budgeting and Accountability: A Best

Practice Approach.”Healthcare Financial Management (July): 78–83.

 Clinical Engineering Section, 840 North Lake Shore Drive, Chicago, Illinois 60611,USA

Website: http://aharc.library.net/

Their documents are published by HealthForum, use website: www.ahaonlinestore.com

 Ginter, P. M., L. M. Swayne, and W. Jack Duncan. 1998. Strategic

Management of Health Care Organizations. Malden, MA: Blackwell.

 Mellen, C. M. 1992. “Valuing a Long-Term Care Facility.”Healthcare

Financial Management (October): 20–25.

 Meyer, A. D. 1985. “Hospital Capital Budgeting: Fusion of Rationality,

Politics andCeremony.” Health Care Management Review (Spring): 17–27.