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FINANCIAL AND OPERATING RATIOS
INSTRUCTIONS: Review Chapters 11, 12 from earlier weeks in class. Read this week’s assigned chapters, 13, 14 & 15, before completing the template. In addition, you will utilize the Ratio Benchmark & Median Table below as well as the textbook appendices 13A, and 13C to complete the operating ratio calculations. As the Practice Manager, you will be utilizing Dr. Smith and Dr. Brown’s Physician Practice financial statements for completing the financial ratio calculations below to determine the feasibility of a capital expenditure. Refer to the Week 4 Assignment directions within the course to understand what is expected in each part of the table below. Thorough explanations and definitions for each section are required. If you include enough detail for each section, the template document will be at least seven pages in length. Include APA citations within the Response Column where appropriate. List your references in APA format on the last row of this template. All citations and references must be in APA style according to the Writing Center guidelines. Once you complete the template, upload the document to the Week 4 Assignment section of the course.
Use the Ratio Benchmark and Median Table below in Part 3 for your analysis on Dr. Smith and Dr. Brown’s financial health status.
| RATIO BENCHMARK AND MEDIAN TABLE | ||
| Ratio | Benchmark – 50th Percentile) for Comparable Physician Group Practices | Median for Comparable Physician Group Practices |
| Current Ratio | *2.2 | 2 |
| Quick Ratio | *1.74 | 1 |
| Debt Service Coverage Ratio | *1.49 | 1.1 |
| Operating Margin | *4.45 | 2.6 |
| Return on Total Assets | *4.04% | 4.05% |
*Benchmark Data: 50th Percentile Information extrapolated from Appendix 33B Case Study.
| PART 1: CALCULATION of FINANCIAL RATIOS: | ||||||
| Below are five financial ratios. In each of the columns, you will be responsible for showing the calculation for each based off Dr. Smith and Brown’s financial statements (located with the textbook). You will need to identify the type of ratio as well. Choices for the type of ratio are: LIQUIDITY, SOLVENCY, PROFITABILITY or N/A. | ||||||
| EXAMPLE for the INVENTORY TURNOVER RATIO: Show Calculation: 180,000/5000 = 36 Identify the type of ratio: n/a | ||||||
| CURRENT RATIO | QUICK RATIO | DEBT SERVICE COVERAGE RATIO | OPERATING MARGIN | RETURN ON TOTAL ASSETS | ||
| Show calculation in the box provided: Identify the type of ratio: | Show calculation in the box provided: Identify the type of ratio: | Show calculation: (For this ratio, the denominator you will use is 22,200) Identify the type of ratio: | Show calculation in the box provided: Identify the type of ratio: | Show calculation in the box provided: Identify the type of ratio: | ||
PART 2: TYPE OF RATIOS | ||||||
| In your own words, define the meaning of each ratio: liquidity, solvency, and profitability. | ||||||
| Liquidity | ||||||
| Solvency | ||||||
| Profitability | ||||||
| PART 3: OPERATING RATIOS | ||||||
| Define the financial ratios listed below. Next, analyze the result for each ratio calculated above and explain what the calculated result tells you about the financial health of Dr. Smith and Dr. Brown’s physician practice | ||||||
| EXAMPLE: INVENTORY TURNOVER RATIO | DEFINE: Inventory turnover is calculated to determine how quickly the inventory is used based on the services rendered. If the inventory turnover is high, this means the hospital does not have enough inventories on hand to accommodate the patient load. ANALYSIS: For this example, the hospital is turning over their inventory 36 times per year, which is about 3 times a month. The opposite is true if the inventory turnover calculation is lower than the median. FINANCIAL HEALTH: This could mean that there is a build-up of inventory due to lower than expected patient revenues. | |||||
| CURRENT RATIO | ||||||
| QUICK RATIO | ||||||
| DEBT SERVICE COVERAGE RATIO | ||||||
| OPERATING MARGIN | ||||||
| RETURN ON TOTAL ASSETS | ||||||
| PART 4: CAPITAL BUDGET EXPENDITURES – TIME VALUE OF MONEY CALCULATIONS | ||||||
| Complete the tables below by computing the following time value of money calculations: Present Value, Internal Rate of Return, and Pay Back Period for the capital expenditures for Dr. Smith and Brown’s physician practice. Enter the result of the calculation into the blank cells. | ||||||
| PRESENT VALUE | ||||||
| CE/Amount | Compounding Period | Rate of Interest | Present Value | |||
| Laboratory: $70,000 | Annual | 4% for 15 years | ||||
| EMR Software: $125,000 | Annual | 6% for 10 years | ||||
| INTERNAL RATE OF RETURN | ||||||
| Initial cost of Investment | Periods of Useful life | Estimated annual net cash inflow generated | Look-up table value | Rate of Interest | ||
| e-prescribing software: $ 75,000 | 10 | $10,190 | ||||
| Lab equipment: $ 58,000 | 6 | $14,108 | ||||
| PART 5: EVALUATION OF CAPITAL BUDGET EXPENDITURES | ||||||
| As a Health Care Manager, you will be responsible for operational decisions by applying financial management principals. For Part 5, you will apply the concepts of the Time Value of Money to define, analyze, and rationalize your findings from the Financial and Operation ratio results to make informed decisions regarding capital expenditures for Dr. Smith and Brown’s physician practice. Include any government or regulatory mandate information that you considered when making your decision. Complete each of the cells below. | ||||||
| Define the time value of money. | ||||||
| Provide a real-world example for the time value of money. | ||||||
| Why is time such an important factor when considering a capital expenditure? | ||||||
| After review of the financial statements and ratios, analyze the feasibility that the EMR Capital Expenditure listed above would benefit Dr. Smith and Dr. Brown’s practice. Explain your rationale on whether you would recommend the purchase of the capital expenditures identified. Include any positive or negative aspects of regulatory or government mandates that were considered in making the decision to purchase the capital expenditures. | ||||||
| REFERENCES | ||||||
| List the references you used to complete this assignment. You must format the references in APA format as outlined in 7th edition guidelines found at the Writing Center. | ||||||
