faculty practice foundation finance 101 june, 2015 1
DESCRIPTION
Agenda Faculty Practice Foundation Overview Financial Statements Objective of Financial Statements Income Statement Balance Sheet Statement of Cash Flows Case Studies 3TRANSCRIPT
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Faculty Practice Foundation Finance 101
June, 2015
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Session Objective
• Broaden member understanding of basic financial principles
• Provide members with a general overview of financial statements and how they are interpreted
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Agenda
• Faculty Practice Foundation Overview• Financial Statements
Objective of Financial StatementsIncome StatementBalance SheetStatement of Cash Flows
• Case Studies
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Faculty Practice Foundation Overview
Faculty Practice Foundation Inc. (FPF)• Nonprofit Organization (501c3 – tax exempt)• Consists of 19 individual Faculty Practice Plans (FPPs)
Separate nonprofit organizations with Unique Tax ID #’sIndividual Operating Budgets and Financial Statements
• Consolidated FPF Financial Statements roll up to Boston Medical Center
• Fiscal Year 7/1 – 6/30 (Academic Year)• One FPF Board of Directors with two corporate members (BMC &
BUSM)
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FPF Governance (Revised as of March 2012)
Karen AntmanDean BUSM
Kate WalshBMC CEO
FPF Board of Directors
BMC CEO 2: Fam Med, Pediatrics, OB/GYNBUSM Dean 2: Radiology, Pathology, Emerg MedFPF CEO 3: Opth, Urology, ENT, OrthoChair of Medicine 3: Derm, Neurosurg, Neurology, PsychChair of Surgery
William Creevy, MDPresident & CEO
FPP PresidentsDepartment Chairs
Administrative Directors
Mary ChapinChief Administrative Officer J. Lindstedt, VP Finance &CFO
J Camillus, VP Amb & Prof SvcsC Charyulu, VP Revenue Cycle
FPF Administrative Staff
Members ReservePowers
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Legal Relationship of FPF to BMC and BUSM• BMC and BUSM are the two corporate members of
the FPF• Role of corporate member
Appoint FPF Board of DirectorsMay amend bylawsApproval of certain actions (reserved powers)
o Addition of new membero Loan agreements / guaranteeso Agreement to sell, assign, convey, transfer a security interest or
mortgage or otherwise encumber the accounts or assetso Merger, consolidation, reorganization, liquidation, dissolution of
the FPF or a sale of all or substantially all its’ assetso Increase or decrease the number of Directors
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Financial Statements
• Income Statement• Balance Sheet• Statement of Cash Flows
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Objective of Financial Statements• Provide information useful for the entity’s stakeholders
Owners, Management, Directors Creditors Regulatory agencies Investors
• Support business and economic decisions Transparency – understand the health of a business and how
well resources are being manage Management principle – If you can’t measure it, you can’t
manage it• Used to formulate budgets
Use historical data to create plans Compare actuals to planned targets
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Income Statement
• Reports the “profitability” of operations• Net income = “bottom line”• Specific period of time
MonthlyQuarterlyAnnual (fiscal year)
Net Income = Revenue - Expenses
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Income Statement – Generic Example
Generic Hospital - Income StatementJanuary 2015, Month to date
Operating Revenue: Net Patient Service Revenue $550,000 Other Revenue 100,000 Total Operating Revenue 650,000
Operating Expenses:Salary, Wages, & Fringe Benefits 450,000Provision for Bad Debts 50,000Depreciation 10,000Other Expenses 100,000 Total Operating Expenses 610,000
Income (loss) from operation 40,000
Non-Operating Gains (losses)Total Non-operating Gains (losses) 50,000
Net Income / (Loss) $90,000
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Income Statement –Net Patient Service Revenue (NPSR)
Net Patient Service Revenue consists of…• Gross Patient Service Revenue (GPSR) – charges for services provided to
patients (sources include: E&M, surgery, procedures, casts, radiology, etc.)
• Free Care – work done for patients without insurance• Contractual Adjustment – amount of charge not expected to be paid based
upon contractual agreements
Gross Patient Service Revenue (GPSR)$1,170,000Free Care (20,000)Contractual Adjustment (600,000) Net Patient Service Revenue (NPSR) $550,000
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Income Statement –Other Revenue
Other Revenue• Ancillary services (includes
Physical Therapy, MRI, Surgical Center)
• Grants• Physician wages from other
entities (includes Health Center revenue and Contract revenue)
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Income Statement –Operating Expenses
Salary, Wages, & Fringe Benefits• Physician and support staff salary,
wages, and fringe benefits make up >80% of all operating expenses
Provision for Bad Debts• Amount of revenue expected to be
collected, but not actually collectedDepreciation
• Reduction in the value of company assets with the passage of time
Other (Operating) Expenses• Include: Billing company fees,
Malpractice, Clinical Supplies, Institutional Fees, Rent, Administrative costs, etc.
AY14 - 82% of FPF Operating Expenses were Salary & Fringe Benefits
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Income Statement –Non-Operating Gains (losses)
Non-Operating Gains (losses)• Income derived from activities
not related to core operations• Includes profits (and losses)
from investments, donations and other non-operating revenues and expenses
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Ratio Formula Performance Implication
Operating Margin Net Operating Income Measures a company’s profit Total Op. Revenue after paying operating costs
Total Margin Net Income Measures a company’s net profit, Total Op. Revenue inclusive of both operating and
non- operating costs
Bad Debt % Provision for Bad Debts Measures the % of collectible revenue Total Patient Net Rev. or GPSR that has been lost
Income Statement –Financial Indicators - Profitability
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Operating Margin (Net Operating Income / Total Op. Revenue)
6.2% = 40,000 / 650,000
Total Margin(Net Income / Total Op. Revenue)
13.8% = 90,000 / 650,000
Bad Debt %(Provision for Bad Debts / Total Patient Net Rev. or GPSR)
4.3% = 50,000 / 1,170,000*
Income Statement – Financial Indicators - Profitability
* See slide 12 for reference
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Balance Sheet• Presents financial position as of a specific date• Lists a company’s assets
Things of value an entity owns or controls Were acquired at a measurable cost
• Lists a company’s sources of funds to acquire assets LiabilitiesEquity
Assets = Liabilities + Equity
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Balance Sheet – Generic ExampleGeneric Hospital – Balance Sheet
January 31, 2015Assets:
Cash and cash equivalents $1,000,000Patient Accounts Receivable 300,000Prepaid Expenses 200,000
Total Current Assets 1,500,000
Property, Plant & Equipment 100,000Total Non- Current Assets 100,000
Total Assets 1,600,000
Liabilities and Equity: Accounts Payable and accrued expenses 1,200,000 Total Current Liabilities 1,200,000
Long-term Debt 250,000 Total Non-Current Liabilities 250,000
Unrestricted net assets 150,000 Total Equity 150,000
Total Liabilities and Equity 1,600,000
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Balance Sheet: Current vs. Non-Current Assets
Current Assets• Used in normal business cycle (1yr)• Cash and cash equivalents• Marketable securities - temporary
investments, easily converted to cash
• Inventories• Listed in order of decreasing
“liquidity”
Non-Current Assets• Not expected to be depleted within
1 year• Land = original cost• Investments
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Balance Sheet: Liabilities & Equity
Liabilities• Funds owed• Accounts Payable and accrued
expenses include - • Amounts owed to suppliers• Amounts owed to employees• Short term loans (lines of credit)• Long-term debt
Equity (net assets)• Funds obtained from equity
investors (owners who supply “capital”)
• Retained earnings or accumulated net income (profit)
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Balance Sheet: Current and Non-Current Liabilities
Current Liabilities • Obligations due within 1 year• Accounts payable• Accrued expenses• Current portion long-term
debt
Non-Current Liabilities• Obligations due > 1 year• Long term debt• Mortgage• Capital leases• Bond issues
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Ratio Formula Performance ImplicationWorking Capital Curr Assets – Curr Liabillities Identifies the dollar value of
excess assets (liabilities)
Current Ratio Current Assets Measures a company’s liquidityCurrent Liabilities or their ability to cover short
term debt *Asset > Liability = + Financial strength
Days in Patient Net Patient A/R Indicates the number of days it takes
Accounts Receivable (Net Patient Rev./365) to collect payments owed to the company
Days Cash on Hand (Cash + Cash Equivalents) Measures the number of days the ((Total Op. Exp. – Depreciation.)/365) business could operate with
current cash available
Balance Sheet Financial Indicators - Liquidity
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Balance Sheet Financial Indicators - Liquidity
Working Capital(Current Assets less Current Liabilities)
300,000 = 1,500,000 - 1,200,000
Current Ratio(Current Assets / Current Liabilities)
1.25 = 1,500,000 / 1,200,000
Days in Patient Acct Receivable(Net Patient A/R / (Net Patient Revenue/365))
199 = 300,000 / (550,000*/365)
Days Cash on Hand((Cash + Cash Equivalents) / ((Total Op. Expense – Depreciation)/365))
608 = 1,000,000 / ((610,000* – 10,000*)/365)
* See income statement (slide 11) for reference
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Statement of Cash Flow
• Details why the amount of cash has increased or decreased
• Shows the flows of cash in and out of the business
• Statement is divided into the following three sections1) Operating activities2) Investing activities3) Financing activities
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Statement of Cash Flow – Generic Example
Generic Hospital – Statement of Cash FlowYTD for period ending January 31, 2015
Cash flows from operating activities: Patient accounts receivable $ 120,000 Accounts payable (60,000) Depreciation 70,000 Provision for bad debts 20,000 Net cash provided by operating activities 150,000
Cash flows from investing activities:Property, Plant & Equipment (110,000)
Capital expenditures (20,000) Net cash used in investing activities (130,000)
Cash flows from financing activities: Long-term debt & capital leases (5,000) Net cash used in financing activities (5,000)
Net increase (decrease) in cash $15,000
Cash beginning of year $ 985,000Cash balance period end $1,000,000
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Statement of Cash FlowImpacting Activities
Operating • Receive payments for services provided
Decrease Patient Accounts Receivable, Increase Cash
• Pay suppliers for goods and services Decrease Accounts Payable, Decrease Cash
• Pay employees Decrease Accounts Payable, Decrease Cash
Investing • Acquire a new fixed asset Increase
Property, Plant & Equipment, Decrease Cash
Financing • Obtain funds by issuing long-term debt
Increase Long-term Debt, Increase Cash• Repay debt Decrease Long-term Debt,
Decrease Cash
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Glossary of Terms
• BMC: Boston Medical Center• BUSM: Boston University School of Medicine• FPF: Faculty Practice Foundation Inc.• FPP: Faculty Practice Plans (Departments)• GPSR: Gross Patient Service Revenue• NPSR: Net Patient Service Revenue• A/R: Accounts Receivable • A/P: Accounts Payable
Faculty Practice Foundation Finance 101: Case Studies
2015
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Case Study 1Accounts Receivable
Facts• This practice has five physicians and a good income
statement (is profitable). • The practice’s policy is to pay bonuses if there is a
cash surplus at the end of the year. It pays $300K in bonuses annually
• However, at the end of the year, despite higher revenue than expenses, there is little cash surplus
• The Practice plans to collect $7,000 per day
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Case Study 1: Financial StatementsOperating Revenue Net Patient Service Revenue 1,650,000$ Other Revenue 70,000 Total Operating Revenue 1,720,000
Operating ExpensesSalary, Wages, & Fringe Benefits 1,292,000 Provision for Bad Debts 50,000 Depreciation 12,000 Other Expenses 80,000 Total Operating Expenses 1,434,000
Income (loss) from operation 286,000$
Non-Operating Gains (losses)Total Non-operating Gains (losses) 44,000 Net Income / (Loss) 330,000$
Income Statement - End of YearAssets:Cash and cash equivalents 10,000$ Patient Accounts Receivable 800,000 Prepaid Expenses 5,000
Total Current Assets 815,000
Property, Plant & Equipment 96,000 Total Non- Current Assets 96,000
Total Assets 911,000$
Liabilities and Equity: Accounts Payable and accrued expenses 145,000 Total Current Liabilities 145,000
Long-term Debt 320,000 Total Non-Current Liabilities 320,000
Unrestricted net assets 446,000 Total Equity 446,000
Total Liabilities and Equity 911,000$
Balance Sheet - End of Year
Financial Indicators:Working Capital 670,000$ Current Ratio 5.6 Days in Patient A/R 177.0 Days Cash on Hand 2.6
Other Metrics:Unbilled A/R 566,250$ % in A/R more than 90 days 21%
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Case Study 1Accounts Receivable
Questions• How much of the bonus can the practice pay right
now?
• How long will the MDs have to wait to receive their bonus in full?
• What could be done to shorten the time period?
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Case Study 2Cash Surplus
Facts• Revenue is down in this practice. The payer mix is poor, and
CMS calculations have dramatically reduced payments during the year
• There are six physicians in the practice and no NPPs Salaries are $200K annually + 29.2% fringe ($258.4K)
• In past good years they have awarded themselves each a $50K bonus, or $300K total cost
• This year there is enough surplus cash to fund the bonus for one and a half more years
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Case Study 2: Financial Statements
Operating Revenue Net Patient Service Revenue 1,265,000$ Other Revenue 275,700 Total Operating Revenue 1,540,700 Operating ExpensesSalary, Wages, & Fringe Benefits 1,550,400 Provision for Bad Debts 65,000 Depreciation 8,000 Other Expenses 60,000 Total Operating Expenses 1,683,400 Income (loss) from operation (142,700)$
Non-Operating Gains (losses)Total Non-operating Gains (losses) 35,000 Net Income / (Loss) (107,700)$
Income Statement - End of Year
Assets:Cash and cash equivalents 450,000$ Patient Accounts Receivable 210,800 Prepaid Expenses 5,000
Total Current Assets 665,800
Property, Plant & Equipment 32,000 Total Non- Current Assets 32,000
Total Assets 697,800$
Liabilities and Equity: Accounts Payable and accrued expenses 42,800 Total Current Liabilities 42,800
Long-term Debt 90,000 Total Non-Current Liabilities 90,000
Unrestricted net assets 565,000 Total Equity 565,000
Total Liabilities and Equity 697,800$
Balance Sheet - End of Year
Financial Indicators:Working Capital 623,000$ Current Ratio 15.6 Days in Patient A/R 60.8 Days Cash on Hand 98.0
Other Metrics:Unbilled A/R 31,600$ % in A/R more than 90 days 23%
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Case Study 2Cash Surplus
Questions• What could the practice do with the extra cash?
• What are the implications in relation to that decision?