CHAPTER 1:

INTRODUCTION TO HEALTH CARE FINANCE

A method of getting money in and out of the business

Revenues = Inflow

Expenses = Outflow

“How does this happen in business?”

The purpose of this text is to show how the various elements of finance fit together; in other words, how “it happens in business.”

The key to understanding finance is understanding the various pieces and their relationship to each other.

Managers within a health care organization will generally have one of three views:

FinancialProcessClinical

The way they manage will be influenced by which view they hold.

The Financial View

Work with finance on a daily basis.

Responsible for the reporting function.

Usually also do strategic planning.

Managers’ Viewpoints

The Process View

Work with the system of the organization.

Responsible for data accumulation.

Often affiliated with the information system department.

Managers’ Viewpoints

The Clinical View

Usually work with and interact directly with patients.

Responsible for service delivery.

Also responsible for clinical outcomes.

PlanningControllingOrganizing and directingDecision-making

Planning — Identify steps that must be taken to accomplish and organization’s objectives.

Controlling — Make sure that each area of the organization is following the plans that have been established.

Organizing and Directing — Decide how to use organizational resources to most effectively carry out established plans.

Decision-Making — Make choices among available alternatives.

The structure of an organization is important to management because It influences the

way the managers manage.

Types of organizations

Profit-oriented (aka “proprietary”)

Non-profit-oriented (aka “not-for-profit”)

Profit-oriented organizations

Are responsible for paying taxes.

May be corporations, partnerships, or individuals.

Non-profit-oriented organizations

Do not pay income taxesand

May be voluntaryor

May be the government

Voluntary organization types may be:churches, private schools, or foundations

Government organization types may be:federal; state; county; city; combination of city-county; hospital taxing district; or state university.

The Organization’s Structure

Organization Charts

Often used to illustrate the structure of an organization.

How the degree of decentralization within the organization.

The Organization’s Structure

The purpose of an organization chart is to indicate

How responsibility is assigned to managers.

The formal lines of communication and reporting.

SUMMARY: The organization’s type affects it’s structure. It’s structure is shown in the organization chart.

Two Types of Accounting

Financial

and

Managerial

Two Types of Accounting

Financial Accounting

Generally for outside, or third-party, use.Emphasizes external reporting.Must be in accordance with generally

accepted accounting principles.Retrospective - (Usually concerned with

transactions that have already occurred.)

Two Types of Accounting

Managerial AccountingGenerally for inside, or internal, use.Used by managers.Not bound by generally accepted

accounting principles.Prospective as well as retrospective

— (Concerned with the future as well as with transactions that have already occurred.

Original Records — Provide evidence that some event has occurred.

The Information System — Gathers this evidence.

The Accounting System — Records the evidence.

The Reporting System — Produces reports of the effects.

The Chart of Accounts

Outlines the elements of your company in an organized manner.

Maps out account titles with a method of numeric coding.

Is designed to compile financial data in an uniform manner that can be decoded by the user.

The Chart of Accounts

Examine the 3 examples of different Chart of Accounts formats in the chapter.

Every organization has differences in its Chart of Accounts that expresses

the unique differences in its own organizational structure.

Books and Records

Capture transactions.

Basic System Elements

Books and Records: The Sequence Is —

Initial transaction to subsidiary journal to general ledger;

Review, adjust, balance through the trial balance;

Create reports (financial statements)

The Annual Management Cycle

The Annual Management Cycle affects the type and status of information the

manager uses.

The Annual Management Cycle

The type and status of information used by the manager includes:

Daily And Weekly Reports — Generally contain raw data

Quarterly Reports And Statistics — Generally have been verified, adjusted and balanced. Called “interim” reports; often used as milestones by managers.

Annual Year End Reports — Generally represents the closing out of a specific reporting period. Primarily intended for external (outside) use.

Communicating Financial Information to Others

It is important to:

Create a report.

With accepted terminology, standard formats, and executive summary.

Organize in a logical flow.

Place detail in an appendix.

Assets, liabilities and net worth

Are part of the language of finance

Assets

Economic resources that have expected future

benefits to the business.

Liabilities

“Outsider claims”; economic obligations, or debts, payable to outsiders

Net Worth

“Insider claims”; claims held by the owners of the

business, a.k .a. owner’s equity, or net worth

Assets, Liabilities and Net Worth

Assets can be either:

Short-term or

Long-term.

Review asset examples in Exhibit 3-1.

Assets, Liabilities and Net WorthLiabilities can also be either:

Short-term or

Long-term.

Review liability examples in Exhibit 3-2.

Net Worth Terminology

Net worth terminology depends on the type of organization, and may include:

“Owners’ Equity”

“Capital Stock” & “Retained Earnings”

“Fund Balance”.

Review Exhibit 3-3 and match the net worth terms above to the three types of organizations.

Organization Types Affect

How Net Worth Is Expressed

What for-profit companies can you name?

What not-for-profit companies can you name?

“And their net worth would be called . . . .”