Question

the ability to identify and record financial transactions is a core skill of accountants and bookkeepers within companies. The growth in technology has greatly enhanced capabilities to capture the data and has opened up new opportunities for robust analysis. Where companies previously had to wait until the end of a month to review information, it now can be accessed and reviewed in real-time. Over the past several weeks you have learned more about the 4 basic financial statements and what type of information each possesses. Based on your understanding of the concepts you have learned this week and further research, complete the following: Identify and support what you believe to be the 2 most critical areas to address in financial analysis, along with how the tasks should be carried out in a healthcare facility.

Answer 1

The two most important areas for financial analysis is the liquidity and solvency of a company, which determine the ability of a company to stay afloat by paying off its long and short term debts

The two ratios involved in the process are the liquidity and solvency ratios

Liquidity Ratio is used to analyze the ability of a company to pay off its short term debt, utilizing the short term assets, while the solvency ratio or the financial leverage ratios, analyses the debt levels in the long term and interests involved on the debt.

Healthcare Facilities are the predominant areas of investment for investors, due to the fact that it is one of the most important industries which is always supported by the government and decides the overall strength of the economy.

Now, the task of liquidity and solvency analysis for healthcare facilities can be made using the two ratios called Cash Flow Coverage Ratio (Liquidity Ratio) and Debt to Capitalization (Solvency Ratio)

Cash Flow Coverage Ratio (Liquidity Ratio)

Healthcare Facilities often depend on financial payments made from insurance companies or the government for the services provided, thus they need to have a consistent cash flow in the short run to keep running.

This ratio is the operating cash flow per unit debt obligation. Hence it indicates the ability of the healthcare facility to meet its financial obligations

Debt to Capitalization Ratio (Solvency Ratio)

Healthcare facilities have huge capital expenditures which they usually service through long term debts.

This ratio is obtained by dividing the long term debt by the total capital available. It indicates the leverage level of a healthcare facility in comparison to the average industry benchmark and hence helps in making decisions like to sell off or lease assets to serve long term debt obligations like interest payments.