By Ann Martel
“If you speak the language of money, you will be more successful. Finance is the way businesses keep score.” Richard Ruback, Willard Prescott Smith Professor of Corporate Finance, Harvard Business School
This is especially true in today’s health care landscape. Pandemics, inflations, and regulations are all part of an ever-changing landscape that make financial acumen more critical than ever for health care leaders.
Understanding financial statements is not just a matter of accounting; it is a strategic necessity that informs decision-making and drives organizational success.
In my development sessions, I often use the following opening: “I have itchy eyes and a scratchy throat- what might be ailing me?” Inevitably I will get a variety of answers—all perfectly legitimate. I point out that while no one in the room is a physician, (although I did have a veterinarian once) they felt comfortable hearing my symptoms and making a pretty good diagnosis!
While financials may seem intimidating at first to people whose talents and interests lie in other areas, understanding them doesn’t require a finance or an accounting degree. Developing a basic familiarity with key financial terms, spending some time with the numbers, and paying attention to the key metrics of the organization are within the abilities of everyone and can produce a range of benefits, from elevating decision making and negotiation skills to improving overall company performance.
Another analogy I often use in my sessions is an image of a baseball scoreboard. Financial statements, like scoreboards, tell the story of what just happened in the game. You can tell what kind of scoreboard you are looking at by its format and terms.
You also don’t have to know all the rules of the game to be able to interpret the final score. That is true with financial statements, too. The three primary financial statements that health care leaders should focus on are the balance sheet, income statement, and cash flow statement.
1. Balance Sheet
The balance sheet provides a snapshot of an organization’s financial position at a specific point in time. It reports assets, liabilities, and equity for an organization. For health care leaders, analyzing this statement is crucial as it reflects the institution’s ability to meet its short-term and long-term obligations.
A strong balance sheet indicates stability and liquidity, which are essential for operational effectiveness, especially in times of financial uncertainty or during significant capital expenditures.
2. Income Statement
The income statement, also known as the profit and loss statement, tells the story of what happened from operating a business during a period of time. It reports revenues, costs, and expenses over that specific period.
This statement is vital for understanding profitability and operational efficiency. Health care is an unusual business model as the pricing for services is negotiated with insurance companies or dictated by governmental entities.
While many health care systems are “non-profit” organizations, maintaining sufficient revenue from all sources is imperative to cover the increasing costs of providing care.
Analyzing trends in revenue streams—like patient services, grants, or investments—can also help leaders identify growth opportunities and areas needing improvement.
Finally, understanding the revenue cycle and its impact on the performance of the organization is critical.
3. Cash Flow Statement
The cash flow statement tracks the flow of cash in and out of the organization. It is divided into three sections:
- Operating Activities
- Investing Activities
- Financing Activities
For health care leaders, this statement is crucial for assessing liquidity and ensuring that the organization can meet its immediate operational needs.
Cash flow management is particularly important in health care, where billing cycles can be lengthy and unpredictable. Leaders should be vigilant about cash flow trends to avoid potential shortfalls that could jeopardize patient care and operational sustainability.
Financial Ratios and Benchmarks
While the primary financial statements are essential, health care leaders should also be familiar with financial ratios and benchmarks derived from these statements. Ratios such as the current ratio, debt-to-equity ratio, and return on assets provide deeper insights into financial health and operational performance.
By comparing these metrics against industry benchmarks, leaders can gain a better understanding of where their organization stands in relation to peers and identify areas for improvement.
Just like learning a new language does not come easy- and you may never be fluent in that language, the language of business requires an effort to gain that basic understanding and reinforcement of the concepts through training or reading, etc.
However, understanding the language of business is a powerful tool that can guide health care leaders in making informed decisions. By prioritizing the balance sheet, income statement, and cash flow statement, leaders can ensure their organizations remain financially healthy and capable of delivering quality care.
Finance and Accounting for Non-Financial Professionals can help you and your team members understand not only these financial statements but also how to use financial information to make more timely, cost-effective decisions and to identify appropriate initiatives and projects for the future.