MHA 612 Financial and Managerial Accounting
Instructor Stacy Hiles
September 10, 2012
Financial Ratios and Healthcare Organizations
Health systems routinely compare their financial results to those of a peer group of healthy competitors. Although managers of most organizations strive to achieve the outcomes of comparable healthy competitors, it is equally important to examine those of unhealthy competitors. By doing so, managers can learn from their mistakes and know what to avoid in the future. All C-level managers (chief executive officers, chief financial officers, and chief operating officers) should ask the following questions on a quarterly basis: Are we financially on track with similar healthy companies, or are we headed for failure like some insolvent companies? Are certain ratios more sensitive and predictive of financial failure than traditional ratios used to describe healthy health systems? What type of indicators (cash based or accrual based) serves as early warning indicators of any financial solvency problems (Coyne, Singh & Smith, 2008)?
Snook and Sudell (1975) state a publication of industry standards for financial ratios has provided hospital financial management with insight into the universal situation. Comparison of the individual hospital’s financial ratios with those of the industry presents the financial manager with a quick and helpful tool. Another helpful type of comparison that can be made with financial ratio-analysis is comparing current ratios with past, and even expected future, ratios. This allows the hospital to gauge the institution’s financial viability and determine deterioration or improvement. The versatility of ratio analysis is practically limitless. Prudent use of financial ratio-analysis allows hospitals not only to understand the financial condition of their institution more fully but also to predict trends and problems, both...