At the Becker's Hospital Review Annual Meeting in Chicago on May 18, Kate Guelich, senior vice president at Kaufman, Hall & Associates, discussed five key financial ratios healthcare providers should track.
1. Operating margin. Operating margin indicates the organization's profitability from operations, including investment-related decisions and interest and depreciation expense.
2. Operating EBIDA margin. This metric indicates the organization's profitability from daily operating activities excluding capital-related decisions and interest and depreciation expense.
3. Days cash on hand. Days cash on hand is a liquidity measure. It represents the number of days an organization could support its operating expenses without collecting any additional cash.
4. Debt to capitalization. Debt to capitalization is a measure of financial leverage and reflects the organization's level of debt compared to its cumulative earnings or funds balance.
5. Capital spending. Capital spending measures the organization's level of capital expenditures as a percentage of annual depreciation expense.
Ms. Guelich shared several case studies that illustrated the importance of these metrics. In one, the organization had high liquidity but an increasing age of plant, declining or flat utilization and decreasing market share. In this case, the organization's high cash on hand did not correlate with overall financial strength because it had inconsistent or declining cash flow. "Maintaining solid liquidity levels is essential to a strong credit position, but targeted, strategic investment is vital to organizational growth," Ms. Guelich said.
Budgeting in Times of Uncertainty: Insight From 3 Hospital CFOs
4 Managed Care Negotiation Strategies for 2012
1. Operating margin. Operating margin indicates the organization's profitability from operations, including investment-related decisions and interest and depreciation expense.
2. Operating EBIDA margin. This metric indicates the organization's profitability from daily operating activities excluding capital-related decisions and interest and depreciation expense.
3. Days cash on hand. Days cash on hand is a liquidity measure. It represents the number of days an organization could support its operating expenses without collecting any additional cash.
4. Debt to capitalization. Debt to capitalization is a measure of financial leverage and reflects the organization's level of debt compared to its cumulative earnings or funds balance.
5. Capital spending. Capital spending measures the organization's level of capital expenditures as a percentage of annual depreciation expense.
Ms. Guelich shared several case studies that illustrated the importance of these metrics. In one, the organization had high liquidity but an increasing age of plant, declining or flat utilization and decreasing market share. In this case, the organization's high cash on hand did not correlate with overall financial strength because it had inconsistent or declining cash flow. "Maintaining solid liquidity levels is essential to a strong credit position, but targeted, strategic investment is vital to organizational growth," Ms. Guelich said.
More Articles on Healthcare Finance:
Current State of Healthcare Credit MarketsBudgeting in Times of Uncertainty: Insight From 3 Hospital CFOs
4 Managed Care Negotiation Strategies for 2012