HCF 7010 Module 1 Financial Statements Written Assignment Example

A 2.0 Percent Operating Margin and $7.9 Million From Investments: Reading a Community Hospital's Statements Before the Budget Cycle

Student Name

MBA in Healthcare Management, Thomas Edison State University

HCF-7010: Healthcare Finance

Mentor Name

Month Day, Year

A 2.0 Percent Operating Margin and $7.9 Million From Investments: Reading a Community Hospital's Statements Before the Budget Cycle

Barnegat Bay Community Hospital is a composite 220-bed nonprofit hospital in Ocean County, New Jersey. Before its finance committee begins the next budget cycle, the finance chief wants a plain-language reading of the fiscal 2025 financial statements: what they show about the hospital's operations, liquidity and capital position, how they compare with the prior year, and what the finance function should focus on in planning. This assignment answers using the concepts in Berger (2014).

Accounting Principles Behind the Statements

Like other nonprofit hospitals, Barnegat Bay reports on the accrual basis, recognizing revenue when services are provided and expenses when resources are used, regardless of when cash changes hands. Its statements are the balance sheet, which shows assets, liabilities and net assets at year end; the statement of operations, which shows revenues, expenses and the excess of revenue over expenses for the year; the statement of changes in net assets; and the statement of cash flows. Berger (2014) stresses that managers need not be accountants to use these statements, but they must understand a few distinctions: that net patient service revenue is what the hospital expects to collect after contractual allowances, not its gross charges; that depreciation is a real cost of using buildings and equipment even though it requires no cash this year; and that operating results must be separated from investment results to judge how the hospital is actually performing.

What the Statements Show

Table 1 summarizes the key figures and ratios for fiscal 2025, with fiscal 2024 for comparison.

The statement of operations tells the central story. Operating revenue grew 3.3 percent, but operating expenses grew 4.5 percent, driven by salaries and benefits of $178.2 million and supplies of $58.4 million. The operating margin therefore fell from 3.1 to 2.0 percent, or $6.6 million on $330.0 million of revenue. The bottom line looks steadier only because nonoperating gains, mostly investment income, rose to $7.9 million, bringing the excess of revenue over expenses to $14.5 million. Investment income is a substantial source of income for many nonprofit hospitals (Bai et al., 2020), but it depends on markets, not on how well the hospital delivers care, so the trend in operations is the more important signal. Bai and Anderson (2016) found that the median U.S. acute care hospital lost money on patient care in 2013, which shows how common it is for hospitals to rely on nonoperating income, and how vulnerable that makes them.

Liquidity remains adequate but is weakening, a pattern that matters because lenders and rating agencies read cash reserves as the hospital's cushion against bad years. Days cash on hand, calculated as cash and board-designated investments of $138.0 million divided by daily cash operating expenses of about $841,000, fell from 181 to 164 days. The current ratio of 1.56 means current assets cover current liabilities. Days in accounts receivable rose from 41 to 45, so cash now arrives four days later than it did a year ago, and roughly $3.5 million more sits in unpaid patient accounts.

The capital position is sound. Debt service coverage of 2.83 means the hospital generated nearly three dollars of cash flow for every dollar of principal and interest due, and long-term debt makes up 35.8 percent of capitalization, down slightly as the hospital repaid principal.

The Finance Function's Role in Planning

Berger (2014) describes the finance function as responsible not only for recording and reporting but for planning, controlling and safeguarding the organization's resources. For the coming year, the analysis points to three priorities. First, expense growth must be brought back in line with revenue; the budget should identify where salary, overtime and agency costs and supply costs rose faster than volume. Second, the revenue cycle needs attention, since the rise in receivable days suggests problems with denials, documentation or billing that the next module will examine. Third, the capital budget should be set with liquidity in mind: with days cash falling, new capital projects should be funded in a way that protects the cash cushion and the debt coverage that lenders and rating agencies watch.

Conclusion

Barnegat Bay's statements show a hospital that remains solvent and creditworthy but whose operations are weakening, masked by stronger investment income. Separating operating from nonoperating results, reading liquidity and collection trends, and linking them to the budget are the core tasks of healthcare financial management, and they give the finance committee a clear agenda for the year ahead.

References

Bai, G., & Anderson, G. F. (2016). A more detailed understanding of factors associated with hospital profitability. Health Affairs, 35(5), 889-897. https://doi.org/10.1377/hlthaff.2015.1193

Bai, G., Yehia, F., Chen, W., & Anderson, G. F. (2020). Investment income of US nonprofit hospitals in 2017. Journal of General Internal Medicine, 35(9), 2818-2820. https://doi.org/10.1007/s11606-020-05929-5

Berger, S. (2014). Fundamentals of health care financial management: A practical guide to fiscal issues and activities (4th ed.). Jossey-Bass.