FINANCIAL STATEMENT ANALYSIS 1

Financial Statement Analysis

Marla K. Michaels

University of Mary

FINANCIAL STATEMENT ANALYSIS 2

Financial Statement Analysis

Introduction

Formalized budget planning provides an effective quantified guide for the management

of revenues and expenses, representing management’s expectations and intentions, which helps

to ensure the use of best methods for the maintenance of fiscal responsibility and health within

an organization (Anderson & Danna, 2013; Finkler, Jones, & Kovner, 2013). Good budgets are

simple, balanced, flexible, and purposed with the intent to utilize available resources in effort to

prevent increasing expenses (Anderson & Danna, 2013). In their conjunctive relationship to

achieve cost center and organizational objectives, budgets force managers to establish goals and

plan ahead, which improves the outcomes of the operations and services an organization

provides and can be appreciated by evaluating fiscal reports (Finkler et al., 2013).

Financial statements are essential tools for managers to effectively manage their unit’s

resources and are typically provided both monthly and for an entire fiscal year. Looking over a

single financial statement shows raw data in which a handful of numbers appear important, but

examination of multiple financial statements is necessary to extrapolate the critical data needed

for a true indication of strengths and weaknesses, and increase or decline of the financial

situation (Finkler et al., 2013). Internal accountants keep track of financial data throughout the

fiscal year and external accountants are contracted to examine or audit the records as an

oversight measure to ensure the generally accepted accounting principles (GAAP) are followed

and the information is presented for public review in a fair, accurate and understandable report

(Finkler et al., 2013). These financial reports are important to a number of interested outside

parties, including but not limited to, the government, creditors, potential investors, donors,

FINANCIAL STATEMENT ANALYSIS 3

shareholders, and stakeholders (Finkler et al., 2013).

In health care organizations (HCOs) centered around hospitals, nurse leaders are

responsible for and control the largest part of the labor budget; therefore, nurse managers must

have functional knowledge of the objectives of budgeting, basic accounting concepts, and

understanding the finances of their organization (Douglas, 2010; Finkler et al, 2013). In the

interest of the fiscal health and the continual overall betterment of the organization, nurse

managers need to be able to competently communicate and collaborate with financial managers.

As health care policies become more complicated and demanding and HCOs are asked to do

more with less resources, the quality and effectiveness of the relationships between nurse

leaders, finance managers and executives can be the difference between an organization’s fiscal

stability or financial turmoil (Douglas, 2010).

Key Financial Statements

There are four key financial statements that are normally prepared for use by external

interested parties; the statement of financial position (or sometimes referred to as the balance

sheet), the operating statement (commonly called the income statement), the statement of

changes (also called the changes in equity statement), and the statement of cash flows (Finkler et

al., 2013). These statements summarize the financial activities of an organization and can be

prepared at any point of time and applied to any span of time (Libby, Libby, & Short, 2009). It is

important to note that the main goal of any organization, for-profit or not-for-profit is to make

money; however, in a for-profit business, the net profit belongs to the owners and stockholders

and in a not-for-profit organization, the net earnings are used to fulfill the mission by acquiring

new and expensive technologies, expand operations, for costs of repair and replacement of

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facilities, and a savings account for unexpected emergencies (Finkler et al., 2013).

Statement of financial position

A balance sheet is the most essential of all the reports because it indicates the financial

position of an organization at a specific point in time by fundamentally summarizing what is

owned and what is owed (Finkler et al., 2013). Liabilities are presented on the right side of the

statement and assets and or equity are shown on the left. The assets minus the liabilities equal the

owner’s assets or liabilities plus owner’s equity equals the assets in a for-profit organization, and

in a not-for-profit organization, assets minus liabilities equals the net assets of the community

since there are no owners (Finkler et al., 2013). For either type of organization, for-profit or not-

for-profit, both sides of the equation must always be equal or balanced.

Operating statement

The statement of operations, as it is called in health care industries, is the primary

performance measure of a business; a report that shows revenues less expenses during a specified

accounting period to reveal net income or profit, or a loss (Libby et al., 2009). Revenues are

reported here whether or not the goods or services have been paid for yet and expenses are

calculated similarly in that they may be paid out during the specified period, but some may carry

over to another report period (Libby et al., 2009). Therefore, net income does not usually equal

the net cash generated by operations (Libby et al., 2013).

Statement of changes

This statement reports how the distribution of dividends and net income affected the for-

profit organization’s financial position during a specified period of time (Libby et al., 2009). The

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balance of retained earnings increases as net income is earned during the year, or decreases with

a loss, which displays the relationship of the operating statement to the balance sheet (Libby et

al., 2009). Issuance of stock increases owner’s equity and the payment of dividends to the

stockholders results in a decrease in retained earnings (Finkler et al., 2013; Libby et al., 2009).

For a not-for-profit organization, this statement exhibits the changes in equity by reconciling the

net assets or owner’s equity from the end of the previous year through the completion of the

current year (Finkler et al., 2013). The reader of this statement is provided with the changes

within the unrestricted, temporarily restricted, and permanently restricted classes of net assets.

Statement of cash flows

A cash flow statement provides data about how much and where cash comes from and

goes out (Finkler et al., 2013). There are three cash flow categories in this statement and each

can either be positive or negative, cash flows from: operating expenses, investing activities, and

financing activities (Finkler et al., 2013; Libby et al., 2009). A prediction of future cash flow can

be found here, which is quite useful for knowing what funds may be available for payment of

dividends to investors (for-profit organizations), debt to creditors or projects an organization

might like to take on (Libby et al., 2009). This statement is commonly used on a monthly and

yearly basis in most organizations (Finkler et al., 2013).

Analysis

The financials made available and interpreted in this section belong to a pediatric sub-

specialty ambulatory clinic in the Midwest United States. The clinic is part of a large division

within a not-for-profit organization that features a specialty hospital and numerous sub-specialty

clinics, as well as research and academic programs that employs a workforce of over 6,500

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people. One unique factor for consideration is that there is a highly specialized procedure

performed within the clinic that is not a part of any other clinic of this particular specialty

anywhere else in the United States. Other unique factors are that the clinic employs a nurse

dedicated to performing specialty outpatient infusions and lab draws, and most of the staff,

including the infusion nurse, perform duties for other sections of the division that are not

included in the financials presented.

I was able to obtain two statements, the income statement and the productivity report for

August 2014. When I requested the statements, September was not available. A unit on the

income statement represents one patient visit and the unit totals equal department volume. There

are two categories for units, inpatient and outpatient. Since the department or cost center is an

ambulatory outpatient clinic, there were only two inpatient units provided for patients during

their stay in the hospital (the highly specialized procedures), and 517 units provided for all types

of the outpatient services (physician visits, nurse visits, infusions, etc.) available for a total of

519 units. The total unit budget for the month of August was 364, which is the normal monthly

budget average over the course of the year. This information shows a favorable variance of 155

units for the cost center in August 2014. The budgeted revenue per patient for August 2014 was

$505.58, which would total $183,955 for the expected 364 units; however, the actual per patient

revenue was $518.97 over 519 units, which equaled $256,523, exceeding the total patient

revenue budget by $85,389.

The operating expenses budget for the month was set at $62,046 with a per unit budget of

$170.63. The actual operating expenses were $77,225, but the actual per unit expense was

$148.80, revealing a more efficient month for the actual revenue to expenses ratio. The operating

expenses budget overage of $15,180 is attributed to variances in staffing ($9421), medical

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supplies ($6,964) and drugs ($1,180). Although the clinic did manage to spend less than the

budgeted allowance in other areas; other supplies ($1,142), other expenses ($1,072), depreciation

($122), and purchased services ($50).

For the productivity report, one FTE (full time equivalent) is equal to an employee

working 40 hours per week. In August 2014, there were actually 12.13 total FTEs or 2148 hours

paid although the budget was set at 10.84 FTEs or 1921 hours. The total actual productive

worked hours were 1853 or 10.46 FTEs (budget 9.38), with and additional 1.66 FTEs paid in

non-productive (paid time off) hours (budget 1.36). An interesting finding was that there was no

overtime hours recorded during this volume heavy month even though there was 0.1 budgeted.

The actual paid FTEs by skill mix showed 0.97 for the nurse manager, 8.88 for RNs, 1.67 for

technical allied health and .61 for administrative assistants.

August is our busiest month of the year and also a time when nurses and care assistants

take vacations before their children go back to school. Most of the physicians take their summer

vacations earlier in the year, which seems to make August a catch up time for them. Our

physicians are also very accommodating for families’ needs and will add extra on appointments

onto their schedules so that patients can be seen before the busy school year begins. With that

being said, August unit volumes are not normal, they are much higher, which provides a

significant boost for the annual total patient revenue.

Assessing the data and interpreting the results using the income statement and

productivity report revealed some interesting perspectives. The most intriguing finding was that

the reported an industry benchmark for hours worked per unit as 2.72, but our clinic was 3.57 in

our most efficient month of the year, which is significantly more, so that is not good, right?

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However, the budget for hours worked per unit was set even higher at 4.62. Likewise, the paid

hour per unit benchmark is stated as 3.11, our actual was 4.14; however the budget was 5.28. I

believe there are a few explanations for this data. One being that the highly specialized procedure

that our department provides and many of the infusion procedures use significantly more nursing

time, which lends to the unfavorable difference in the paid hours per unit against the industry

benchmark. Another thought is that nurse only visits are counted as a unit but do not bring in

near as much revenue as a physician visit unit, which is unfavorable for revenue per unit;

however, it still increases the revenue per hours worked ratio. Another thought is that because of

our institution’s ardent dedication to staff (at all levels) collaboration on the multitude of

research and education programs, and more importantly, the impassioned commitment to

providing the highest quality health care possible, the administration recognizes and accounts for

a significant variance in what is benchmark or average for the industry because it will simply not

suffice for the extraordinary efforts and outcomes demanded by the administration of our

institution. For this month, the expense per unit was quite favorable. The budget was set at

$170.53, but the actual expenses were $148.80, which also led to a favorable actual salary per

unit of $131.98, when the budget was $160.44. The supply expenses for the month was not

favorable at $23.47 per unit since the budget was set at $15.26, but the significant increase in

infusions and the specialized procedures and the supplies needed to complete them from the

normal unit volume is an intelligible rationale for this overage.

The fact that there were no overtime hours during such a busy month is quite intriguing. I

believe there are a few reasons for this. There is only a total of four FTEs in our cost center and

all other staff is less than one, with six 0.8 FTEs and two 0.6 FTEs, which reduces the likelihood

and occurrence of staff working over 40 per week. That is not to say that some staff members did

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not work more than their FTE status and therefore contributed to the budget overage for salaries

and wages, because that did happen, but it was the staff who are not a whole FTE and they did

not go over 40 hours within a work week. Another reason for the lack of overtime hours is that

when staff take vacation days, they have a choice to use their hours worked over during a week

to cut down on the amount of paid time off (PTO) they have to use to bring them up to their FTE

status. The staff members working less than one whole FTE can do this over a 2 week period, as

long as they do not go over 40 hours in one designated consecutive 7 day period; that would

legally have to be paid as overtime in accordance with labor laws (Mathis, Jackson, & Valentine,

2014). A final contributing factor for the lack of overtime hours is that our department

encourages staff to flex their hours as appropriate to cut down on hours worked over their FTE

status. I believe this is a valuable tool for administration to use in effort to keep staff in the clinic

during their individually busiest and most productive times and allow for them to come in late or

leave early when they are able to.

U.S. News & World Report has ranked our division in the top ten for our sub-specialty

category for several years, which is higher than any of the other sub-specialties in our institution.

August 2014 proved to be especially profitable with the noted increase in unit volume, even with

overages in drug, medical supplies and especially salaries and wages. I believe that our

institution’s administration finds the value in our work to be exceptional, as supported by U.S.

News & World Report, and it is in our best interest to continue our efforts as long as we endeavor

to keep our cost center’s revenue balanced with, or in excess of the expenses.

The individual I met with to obtain and review the financial and productivity statements

is my Nurse Manager. Interestingly, she is a graduate of the University of Mary dual MSN/MBA

degree program. After reading my analysis of the statements, her comments were “Its fabulous,

FINANCIAL STATEMENT ANALYSIS 10

nice work,” (A. E. Nau, personal communication, October 29, 2014) and that my “analysis of the

figures was spot on”. She also provided some rewording of a one of my interpretations so that it

would be clearer for the reader. I also met with my neighbor (and best friend) who was an

external CPA for Arthur Anderson for several years before becoming an internal accountant for

the last 22 years at a large organization with headquarters in our area. She assisted me with

identifying and describing the statements as I began analyzing the statements. T. A. Keyes

(personal communication, October 25, 2014) stated that she was not familiar with health care

organizations specifically because the CPAs at Arthur Anderson each had their specialties;

however, she stated they are still just an income and productivity statement and the data is

relatively the same.

Conclusive Summary

In the ever-increasing complex world of health care, nurse mangers need to be

knowledgeable of financial and budgetary principles; able to interpret the data provided in

financials; and proficient at tying the relationships of the information from multiple statements

and interpreting information they reveal when combined. Much like a nursing care plan, a budget

is a tool to guide activity (Anderson & Danna, 2013). Developing and using a budget is a must

for effectively managing costs, quality, and efficiency in any business, but as the Patient

Protection and Affordable Care Act continues to unfold, these skills will become increasingly

critical for the health care industry, particularly nurse managers.

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References

Anderson, B. & Danna D. (2013). Budgeting principles for nurse managers. In L. Roussell,

(Ed.), Management and leadership for nurse administrators (pp. 435-477). Burlington,

MA: Jones & Bartlett Learning.

Douglas, K. (2010). Taking action to close the nursing-finance gap: Learning from

success. Nursing Economic$, 28(4) 270-272. Retrieved from

http://www.nursingeconomics.net/necfiles/staffingUnleashed/su_JA10.pdf

Finkler, S.A., Jones, C. B., & Kovner, C. T. (2013) Financial management for nurse managers

and executives. (4th Ed.). St. Louis, Missouri: Saunders.

Libby, R., Libby, P. & Short, D. (2009). Financial accounting. [DX Reader version].

Retrieved from

http://highered.mheducation.com/sites/0073324833/student_view0/ebook/chapter1/

chbody1/the_four_basic_financial_statements__an_overview.html

Mathis, M. L., Jackson, J. H. & Valentine, S. R. (2014). Human resource management. (14th ed.)

Stamford, Connecticut: Cengage Learning.

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Appendix A

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Appendix (con’t.)

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Appendix (con’t.)