Question

Based on your knowledge of the use of ratios in healthcare, concisely discuss four reasons why healthcare managers need to understand and use this financial analytical tool in their work.

Answer 1

Financial Ratios are critical for any kind of business to operate successfully and to avoid any unexpected outcomes from the decisions.

Financial ratios are critical for the healthcare industry as well. Healthcare managers need to understand and use this tool for the following reasons –

1. Profitability Analysis – Healthcare mangers managing the business need to analyze the profits and the income generated from the business. Cash flow ratios and operating margins are the indicators of the survival of the business in the market.
2. Operational Analysis – Healthcare managers need to monitor the operations of the hospital / private clinic. The operational ratios present the status regarding inventory, purchases, utilization of the operation theater, treatments and procedures, staff requirement for each patient, admin support required at the various levels etc. All these analyses can be carried out with the help of financial ratio tool to manage the daily operations.
3. Debt Analysis – This ratio is critical from the stakeholder’s perspective. A high debt compared to the total capital is a risky business model and may impact the liquidity and credibility of the business. Managers may use this ratio to increase the sources for the capital and with the better credibility, loans can be availed at better rates in turn improving the credibility and liquidity of the business.
4. Cash Flows – Analysis of the cash flows is another important area of focus for the healthcare managers. They need to analyse the various bills that have not been settled for long, settlements with the government offices, and insurance companies. Any shortfalls in the availability of the cash may impact the operations.