Ratio Analysis

Need a 150 word response to both of these replies:

1) Days in Accounts Receivable 20X0 = 60 20X1 = 48

I chose this liquidity ration because it demonstrates how fast the organization can turn their services into cash. The faster it can do so, the more working capital available, hence the less financing needed. In this particular scenario, Collingswood Community Hospital has done an excellent job of decreasing its cash turn-around time from 60 days in 20X0 to 48 days in 20X1 (Zelman, McCue, Glick, & Thomas, 2014). The benchmark for a 189 bed facility such as Collingswood Community Hospital is 45 days for days in accounts receivable (Zelman, McCue, Glick, & Thomas, 2014); 3 days less than what Collingswood Community Hospital reached in 20X1. One way to reduce this time period would be to offer a 2% discount on bills when paid within 10 days. Kruis (2017) states this will “capture a financial return that trumps the investment yield forfeited or borrowing rates incurred to capture the discount” (p. 47). Another way to reduce this time period is to automate invoices and payments through online technologies (Kruis, 2017).

Salary and Benefit Expense as a Percentage of Total Operating Expense 20X0 = 50% 20X1 = 43%

I chose this revenue, expense, and profitability ratio because it focuses on perhaps one of the most significant ongoing costs; labor expenses. In this particular scenario, Collingswood Community Hospital has again done an excellent job of decreasing its overall labor costs from 50% in 20X0 to 43% in 20X1 (Zelman, McCue, Glick, & Thomas, 2014). It is important to keep in mind however, that this can be both a good or bad thing. Further research would be necessary, looking at overall wait times and quality outcomes, along with these decreases in labor, to ensure that they have not negatively impacted the hospital. The benchmark for a 189 bed facility such as Collingswood Community Hospital is 38% (Zelman, McCue, Glick, & Thomas, 2014); 5% less than what they achieved in 20X1. Again, the 5% may be made up with increases in quality, but because we do not have that information, it will be assumed that they need to lower their salary to benefit expense. Taylor (1995) suggests creating part-time and per diem positions for departments that do not have consistent work-loads, so Collingswood can utilize more staff when necessary, and reduce when necessary. Another option would be to hire more nurse practitioners to handle lower level case management, which reduces salaried expenses as well as frees up M.D’s to focus on more complicated case work, increasing quality and efficiency.

Operating Margin 20X0 = 0.08 20X1 = 0.04

I chose this revenue, expense, and profitability ratio because it measures profitability from the perspective of main line of business. It shows how much profit is made on each dollar, AFTER the operating expenses are subtracted. In this particular scenario, Collingswood Community Hospital had an operating margin of 0.08 in 20X0 and 0.04 in 20X1 (Zelman, McCue, Glick, & Thomas, 2014); indicating that operating expenses have increased faster than revenues for operation. Once again, this ratio must be considered carefully as investments in innovative technology for example, may cause these percentages to decrease temporarily due to the upfront investment and more research is necessary in order to obtain a fully accurate picture. The benchmark for a 189 bed facility such as Collingswood Community Hospital is 0.03 (Zelman, McCue, Glick, & Thomas, 2014); one percentage point below they reached in 20X1, indicating that despite the fact that their operating margin has reduced 0.04 percentage points, they are still above the industry standard. In this circumstance, there is no necessary intervention needed, only close evaluation to ensure that the operating margin does not decrease further in the upcoming quarter.

Total Asset Turnover Ratio 20X0 = 1.20 20X1 = 0.90

I chose this activity ratio because it demonstrates the overall efficiency Collingswood Community Hospital has in generating revenue from their assets. This is important in gauging how efficient Collingswood’s investments are. In this particular scenario, Collingswood Community Hospital had an asset turnover rate of $1.20 in 20X0 and 0.90 in 20X1(Zelman, McCue, Glick, & Thomas, 2014); a decrease of .30 cents on the dollar. Here again, it is important to note that an average of the year would provide a more accurate picture that takes into account seasonal changes (Zelman, McCue, Glick, & Thomas, 2014). The benchmark for a 189 bed facility such as Collingswood Community Hospital is 1.03 (Zelman, McCue, Glick, & Thomas, 2014); .13 cents higher than what they are making on the dollar. Perhaps the most efficient way to increase their return on their assets would be to invest in an EMR (electronic medical record) system (Ginn, Shen, Moseley, 2011). Not only will it increase overall performance, it also offers cost savings by lowering risk, facilitating preventative medicine, and eliminating cost of medical transcription (Ginn, Shen, Moseley, 2011).

Debt Service Coverage Ratio 20X0 = 4.00 20X1 = 2.75

I chose this capital structure ratio because it demonstrates how easily Collingswood Community Hospital can repay its loans. This is especially important in an ever-changing health care environment which requires a great deal of upfront investment in order to adapt to such changes quickly. In this particular scenario, Collingswood Community Hospital had a debt service coverage ratio of 4.00 in 20X0 and 2.75 in 20X1 (Zelman, McCue, Glick, & Thomas, 2014); a decrease of 1.25. This indicates that Collingswood Community Hospital has seen a significant reduction in its ability to pay off long term debt. The benchmark for a 189 bed facility such as Collingswood Community Hospital is 3.63 (Zelman, McCue, Glick, & Thomas, 2014); significantly higher than what they have been able to achieve. This is quite concerning as it demonstrates that Collingswood has a very limited ability to pay off long term debt and future investments will be limited unless working capital is used. Due to the significant drop from one quarter to the next, it would be necessary to do further research in determining why this drop happened. Increasing Collingswood Community Hospital’s liquidity ratios will offer relief in this circumstance, and as we see in the reduction of days in accounts receivable ratio, they are already doing this. The focus needs to continue on their liquidity ratios to generate enough working capital to address their limited ability to payback current debt.

Net Assets to Total Assets 20X0 = 0.65 20X1 = 0.42

I chose this capital structure ratio because of the concerning DSCR ratio as it represents the proportion of total assets that have been financed through equity. This will further examine the ability of Collingswood to pay off funds received through lending. In this particular scenario, Collingswood Community Hospital had a net assets to total assets ratio of 0.65 in 20X0 and 0.42 in 20X1 (Zelman, McCue, Glick, & Thomas, 2014); a decrease of 0.23. This decrease limits the ability of Collingswood to obtain funds through lending. The benchmark for a 189 bed facility like Collingswood Community Hospital is 0.51(Zelman, McCue, Glick, & Thomas, 2014); further confirming Collingswood limited equity to pay off funds that have been financed. As in the above circumstance, this indicates that Collingswood should focus on their liquidity ratios in order to generate enough working capital to cover their financial obligations.

Second response)

This was chosen for how to understand performance in collection payment in the AR balance. As we see Collingswood Community Hospital as lengthen the number of days it takes to collect on accounts in AR. We should understand first that 20×0 the hospital had 60 days for account receivables and 20×1 decreased to 48, which means the hospital needs to collect within 48 days to have a positive net revenue (Zelman, McCue, Glick, & Thomas, 2014). The problem we can see that the average time it takes to collect on the accounts went from 48 days in 20×0 to 62 days in 20×1. So, in 20×1 we know the hospital need to collect in 48 days, but the average time an account is active with a balance is 62, the collection ration is very poor, but compared to the industry standard of 51 Collingswood Hospital is doing below that industry average (Zelman, McCue, Glick, & Thomas, 2014). This tells me that there is a process on the collection process that needs to be fixed or the company is beginning to write off bad debt to decrease the AR balance which affects the collection period. I would recommend that the hospital first look at the collection of claims through insurances. The technology is getting better and more automated, and it needs to be determined if the current system is keeping up with the times and collection of payments from insurances companies are being followed up on, if there is an error or rejection. The AR balance left over should be post contractures and remining balance after insurance payments.

Revenue, Expense, and Profitability:

Operating Margin (20×0 = 0.08 and 20×1 0.04)

I chose operating margin because lets me now the overall performance of the hospital for the service being provided, what we charge, to what we collect, and the cost it takes to perform the service. As we can the hospital is down 50% from year to year, which allows me to see that the current operations, salaries, and charges we have in place are not working, and there is a need to begin looking at ways to decrease cost, to get back to the higher profit margin. We should understand for example on healthcare that if we perform an x-ray, and the total cost of that x-ray is 1 dollar, then in 20×0 it took 0.92 of that dollar to provide the service and then in 20×1 it takes 0.96 of that dollar to perform the service. It should be recommended that we look at the current charges and salaries for the hospital to ensure we are within reason of operation. The high probability is that we are not performing enough services within the hospital or our collections is way down. According to the industry average for this size hospital they should have a operating margin of 0.03 and Collingswood is below that average (Zelman, McCue, Glick, & Thomas, 2014).

Activity Ratios:

Total Asset Turnover (20×0 =1.20 and 20×1 = 0.90)

This was chosen as a building off the accounts receivable issue that seems to be a problem for Collingwood Community Hospital. In 20×0 we can see the performance was great collection 1.20 above operating cost, but in 20×1 the drop significantly to 0.90 but still better than the industry average of 1.03 (Zelman, McCue, Glick, & Thomas, 2014). This number along does no show poor performance for the hospital in net revenue, but the decrease is what is concerning. Also, noted it is better than the industry average, it still is a red flag for the CFO to investigate what has caused the poor performance. I would recommend the billing department, and examine the collection process.

Capital Structure Rations:

Long-term debt to net assets(equity): 20×0 = 0.55 and 20×1 = 1.40

This was chosen to examine the hospitals debt based on how much the owe leveraged against assets. We can see that in 20×0 the equity was 0.55 and grew in 20×1 to 1.40 which means more debt (Zelman, McCue, Glick, & Thomas, 2014). This tells me that based on the amount of debt assumed over the year from previous year against assets, the hospital will have more money going out towards debt then previous year. This is important to us as we begin to ensure our net revenue is profitable to allow for this debt in ensure that we don’t default on any loans. This has almost doubled in a year but if the hospital maintains productivity and increase revenue it is not concerning. When the hospital begins to operate in the positive. The issue with this ration is that is it significantly worse than the industry average of 0.31, which like mentioned there is a lot of debt for this size hospital (Zelman, McCue, Glick, & Thomas, 2014). I would think this is an area that needs to be a focus as the years progresses and the need for more debt should be avoided.

 

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