EDN 816 Module 2 Reading Hospital Financial Statements Example

Four Statements, Nine Ratios: Reading a Community Hospital's Financial Health as a Nurse Leader

Student Name

Doctor of Education Program, Aspen University

EDN 816: Financial Management in Healthcare Environments

Instructor Name

Month Day, Year

Four Statements, Nine Ratios: Reading a Community Hospital's Financial Health as a Nurse Leader

Every year Linden Ferry Medical Center's audited financial statements are presented to its board, and every year most of its clinical leaders never read them. The chief nursing officer has asked each nursing director to review the statements for the fiscal year just ended and report what they show about the hospital's ability to sustain patient care. This paper does that. It explains what each statement contains, calculates nine ratios that summarize the hospital's financial condition, compares them with the board's targets and explains what they mean, together and separately, for the people who deliver care. All amounts are in thousands of dollars unless stated otherwise.

The Four Statements

A nonprofit hospital publishes four statements. The statement of operations reports revenue and expenses for the year and the resulting operating income. The balance sheet lists assets and liabilities as of the last day of the year. The cash flow statement traces the change in cash, separating operating, investing and financing activities. The statement of changes in net assets shows how the hospital's equity, divided into net assets with and without donor restrictions, changed over the year. Between them the statements settle three questions: did the hospital earn enough, does it have enough, and can it pay what it owes?

The Year's Results

Linden Ferry reported net patient service revenue of $286,400 and other operating revenue of $12,600, for total operating revenue of $299,000. Operating expenses totaled $286,700: salaries and benefits of $158,500, supplies of $52,300, purchased services and other expenses of $54,900, depreciation of $16,800 and interest of $4,200. Operating income was therefore $12,300. Adding $6,100 of investment income left an excess of revenue over expenses of $18,400.

The Year-End Position

At year end the hospital held $38,200 in cash and $110,000 in board-designated investments, net patient accounts receivable of $36,500, inventory of $6,800 and other current assets of $4,500, for current assets of $86,000. Current liabilities were $41,000. Long-term debt stood at $118,000, and net assets, which play the role equity plays in a company, at $260,000. Accumulated depreciation on buildings and equipment was $201,600. The cash flow statement showed operating cash flow of about $33,100, capital spending of $21,500 and principal repayment of $6,500.

Nine Ratios

The table calculates nine ratios and compares each with the target set by the board's finance committee.

Profitability

An operating margin of 4.1% means the hospital kept about four cents of each dollar of operating revenue after paying for operations. That is adequate for a nonprofit community hospital but not generous: at Linden Ferry's size, one percentage point of margin is about $3 million, roughly the annual cost of 25 registered nurses. National estimates suggest that adding nursing hours raises hospital costs by 1.5% or less while reducing adverse outcomes (Needleman et al., 2006), so staffing decisions of that size are within the range a margin like this must absorb. The excess margin of 6.0% includes investment income, which varies with markets and should not be relied on to fund operations.

Liquidity and Receivables

With 200 days of cash on hand, the hospital could meet its cash expenses for more than six months without new revenue, a cushion that protects it in a downturn and supports its credit rating. The current ratio of 2.10 shows ample short-term resources. The one weak liquidity signal is days in accounts receivable, at 46.5 against a target of 45. Each additional day ties up about $785,000 of cash, so reducing receivables to target would free more than $1 million. Nursing affects this ratio more than managers realize: incomplete documentation delays coding and billing.

Debt and Capital

Debt is moderate, at 31.2% of capitalization, and the hospital earns 3.68 times its annual debt payments, well above the board's minimum and above the levels lenders usually require. The concern lies elsewhere. An average age of plant of 12.0 years, against a target of 11, signals that buildings and equipment are wearing out faster than they are being replaced; capital spending of $21,500 only modestly exceeded depreciation of $16,800. The hospital will need significant capital investment, including the projects nurse leaders request, in the coming years.

Reading the Ratios Together

No single ratio tells the story. Together they describe a hospital that is profitable, liquid and carrying moderate debt, with two warnings: receivables that are slightly slow and a physical plant that is aging. Its capacity to borrow suggests it can finance renewal, but its thin margin means that borrowing must be matched by earnings that can service it. For nursing, the implications are practical: capital requests for equipment and renovation will compete for limited funds, and improvements in documentation and throughput help the hospital in ways that show up directly on these statements.

Limits of the Analysis

Ratios from a single year can mislead. A better analysis would compare three to five years to identify trends and would compare Linden Ferry with similar hospitals rather than only with its own targets. Profitability that looks similar on paper can rest on very different markups and market positions (Bai & Anderson, 2016). Audited statements also report the hospital as a whole; they do not show which services earn or lose money, nor how much charity care the hospital provides relative to its tax benefits, a question national research has pressed on nonprofit hospitals (Bai et al., 2021). Those questions require managerial accounting, the subject of the next module.

Questions a Nurse Leader Should Ask

Nursing directors can use the statements to ask sharper questions: Which capital projects does the aging plant make most urgent? How much of the receivables delay traces to documentation? How would a shift in payer mix change the operating margin? What is the plan to fund replacement of patient care equipment? Asking these questions in budget meetings signals that nursing leadership understands the hospital's finances and can make its case in the same terms the board uses.

Conclusion

Linden Ferry's statements show a hospital in sound but not comfortable condition: a 4.1% operating margin, 200 days of cash and strong debt coverage, offset by slow receivables and aging facilities. Reading them through nine ratios turns a dense document into a set of answers about earnings, resources and obligations. For nurse leaders, the reward is influence: understanding the statements lets them connect patient care decisions to the hospital's financial health and argue for resources with evidence.

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., Zare, H., Eisenberg, M. D., Polsky, D., & Anderson, G. F. (2021). Analysis suggests government and nonprofit hospitals' charity care is not aligned with their favorable tax treatment. Health Affairs, 40(4), 629-636. https://doi.org/10.1377/hlthaff.2020.01627

Needleman, J., Buerhaus, P. I., Stewart, M., Zelevinsky, K., & Mattke, S. (2006). Nurse staffing in hospitals: Is there a business case for quality? Health Affairs, 25(1), 204-211. https://doi.org/10.1377/hlthaff.25.1.204