In this activity, you will examine a health care scenario to gain an appreciation for business realities that are not readily reflected in financial statements. Then you will craft and e

Scenerio

Owen Welch, CFO: Hi, everyone. As you know, we're going to go over the financials for the fiscal year just past and the outlook for the current fiscal year. Did everyone get the end-of-year statements and the budget data for the past three years? [pause] Okay, good. Let's get started.

One of my primary concerns right now is the negative balance in our cash account. We do not have the cash reserves that we should have to run the hospital. Now, our accounts receivable team has been working hard to reduce the days in accounts receivable, and they've been more aggressive with collections to bring money in the door. But despite all this, we've been overdrawing our accounts to make payroll.

I don't need to tell you that this needs to be addressed immediately. Now, some of this is timing. We've got significant expenditures and construction costs for the new buildings in our expansion. At the same time, we haven't recognized the increase in revenue yet to cover these additional costs.

Now, our debt to assets ratio indicates a high level of leverage. We currently stand at 1.2, with $231,341,925 in liabilities and $191,246,229 in assets. Now, as we know, anything above 1 indicates financial risk. Again, our recent expansion has caused a lot of this, but simply knowing why doesn't solve the problem. That's why we need to tighten our belts this next year.

Raman Gupta, Board Member: Owen, I talked to Geoffrey about this. I'm a little confused about the disconnect between what you're saying and what we're seeing in the patient revenue numbers. Shouldn't we be celebrating, not worrying?

Owen Welch: You're right about the disconnect, Raman. Let me explain. Our inpatient revenue is definitely up, and that makes it look like we're doing just fine. But what you can't see from the numbers I gave you is that our inpatient volume is actually down.

We had fewer surgeries and deliveries here in the past fiscal year, because of the construction. But the decline in the number of surgeries was offset by the revenue from each surgery.

Our new bariatric surgical practice generally yields more revenue per patient than other practices – which is one reason why we pursued it. But obviously, we can't subsidize the other practices long-term, and that's why there's the concern even if the financials don't reflect it. We hope those inpatient volumes will return to the levels we're used to this year, but we may need to take a more proactive stance on getting that volume up again.

Jennifer Nash, Board Member: So what would you say is our position as we move forward with the strategic plan? Are we in good shape or do we need to look at a different time line with implementation?

Owen Welch: Keep in mind that back in January, we required a 5 percent cut in operating expenses for the current fiscal year. So with those cuts, we've developed a cushion that will keep us on track — we hope.

We didn't want to have to do that, but when it came down to it, as you remember, we decided that we would proactively find some efficiencies rather than hope for increased growth. It's my belief that we can continue implementing on the established schedule, but we'll obviously be revisiting that at mid-year to make sure the variance isn't going in the wrong direction.

Paul Darnell, Board Member: Are we comfortable with what we're seeing in those wage and benefit numbers?

Owen Welch: I certainly am. The changes reflect two factors: One is the normal wage inflation, and the other is expanded staff.

Most of that staff expansion comes from the new doctors and other staff in the bariatric practice, which as we've discussed is already generating the ROI we were hoping for. But a portion of it comes from a single new plastic surgeon we hired. She is also part of that per-surgery increase that made up for our lack of volume, because she brought new patients with her. Those patients yielded revenues we needed, without requiring the normal marketing expenditures for bringing in new patients.

Thanks for coming, everyone! Questions?

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