Using the current ratio, one can assess the organization’s ability to meet its short-term obligations

Capital is limited, which is why the budgeting process is so important. Each year healthcare departments will make their case about which capital purchases they need and then decisions have to be made about which purchases will actually be made. Please reference notes below to assist with answering question.

1)What are your thoughts about how to best make the decisions? What criteria would you use?

Notes from class

The goal of the departments is to provide the evaluation team with a clear understanding of the modeling process and why the results turn out as they do. The session concludes after the team has converged on a final list of approved capital requests.

An intuitively appealing alternative to optimization is to rank projects using benefit-cost ratios or the closely relatedprofitability index.

Projects are prioritized by selecting the highest ratio projects until funds are exhausted. This approach produces the highest value for the amount spent, but may not spend all available funds. If there are less costly projects with nearly the same ratio values as the last projects funded, then substituting these may produce higher aggregate benefit.

Analysis to assess financial condition

Vertical analysis compares items of data relative to their total. The values of individual items are expressed as a percentage of the total, say, salaries and supplies as a percentage of total revenues. This analysis shows where the major part of revenue is coming from, or what is claiming the most in expenses.

Horizontal analysis compares data over time. The current value of an item, say patient revenues, is compared to its value in the previous year. This analysis helps identify a trend, favorable or unfavorable, so that suitable action may be taken.

Net profit as a percent of revenues shows the profit margin. Using the current ratio, one can assess the organization’s ability to meet its short-term obligations

Analysis of operating indicators goes beyond financial data and can be used to assess the efficiency of operations. A measure of utilization of capacity is given by average length of

Properly used, this number-crunching gives insight into the current and future operations of an organization. Whenever you use statistics, either raw or as ratios, remember that it is the interpretation of the data that is important.

Types of Budgets

Although there are various types of budgets, healthcare facilities usually maintain the following three types of budgets: cash flow budgets, operating budgets, and capital budgets.

A cash flow budget projects an organization’s cash inflows and outflows over a certain period of time, generally one year. Its main use is to predict the company’s ability to receive more cash than it will be required to pay out. This is very important because an organization must have the necessary cash on hand to pay its employees’ salaries, pay its vendors, and make loan repayments when they fall due.
An operating budget projects the organization’s revenues (for example, patient revenues) and costs (for example, salaries, supplies, insurance, and rent) for operations over a certain period of time, generally one year. Operating budgets are usually developed for each department within the organization.
A capital budgetis used to plan for the acquisition of buildings (or modernization of existing facilities) or the purchase of equipment (or other technology). These are long-term assets used for longer than one year. They are expensive and require careful planning.