Fianacial Management.pptx

A brief concept of Financial Management in Hospitals

1. Financial Management in Hospital Brigadier General Dr Zulfiquer Ahmed Amin M Phil, MPH, PGD (Health Economics), MBBS North South University

2. Financial Management means planning, organizing, directing and controlling the financial activities , such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. What is Financial Management

3. Objectives of financial management 1. Profit maximization : Profit maximization is the process by which a business arranges its prices and cost structure to achieve the highest possible profit . 2. Wealth maximization : Wealth maximization is the concept of increasing the value of a business in order to enhance the value of the shares held by its stockholders. 3. Company survival : Effective financial management helps a company to avoid bankruptcy and stay in existence , which means that employees continue to have jobs, products and services continue to reach the market, and patients continue to get quality care.

4. 4. Cash flow maintenance : Managing cash flow keeps money available for daily expenses , including the purchase of raw materials to produce goods and the payment of utilities and salaries . 5. Capital cost minimization : Raising capital (Land, buildings, construction, equipment) involves spending money on interest, fees and other costs. Keeping these expenses under control contributes directly to profits. 6. Funds estimation : Businesses must make the best estimate of how much money is needed to operate in the short and long term. 7. Capital structure determination : Financial managers determine the right mix of debt and equity to finances operation and growth.

5. Profit vs Wealth Maximization Profit Maximization Wealth Maximization Profit is what remains out of the total revenue after paying for all the expenses and taxes for the financial year. Ability of the company to increase the value of company’s share of the stakeholders over some time To increase the profit, companies can either try to increase the price or try to minimize their cost structure. The value depends on several tangible and intangible factors like sales, quality of products or services , brand name etc. Focus is on short-term earnings Focuses on increasing the value of the stakeholders in the long term .

6. Functions of Financial Management

7. Investment Decisions include outflow of cash , Financing Decisions includes an Inflow of cash ( through borrowing, or investment from outside sources), and Dividend Decision includes distribution of profits to shareholders.

8. 1. Investment decisions: A firm needs to decide where to invest in order to gain the highest returns . The decision of investing funds in the long term assets ( Fixed Assets ) is known as Capital Budgeting. The investment made in the current assets or short term assets is termed as Working Capital Management.

9. 2. Financing Decision Financing decision is, concerned with the decisions about how much to be raised from which source for execution of investment decision. The main sources of funds for a firm are shareholders funds (Equity capital and retained earnings), and borrowed funds , raised as debentures or other forms of debt .

10. Points of differences Financing Decisions Investment Decisions Meaning It tells about the source from where the capital can be raised . The decisions regarding the investment of funds for getting maximum benefits for the firm. Sources Owner’s Funds include Share capital, Retained earnings . Whereas debentures, loans, bonds are included in borrowed funds . L ong-term capital   decision: R elated to buying Machinery for Production, Purchase Land, and building for expansion. Short term capital decisions: R elated to expenses for day-to-day activities. Functions Financing Decisions includes an Inflow of cash . Investment Decisions include outflow of cash . Differences Between Financing and Investment Decision

11. 3. Dividend decision: The finance manager has to take decision with regards to the net profit distribution . Net profits are generally divided into two: Decision of amount of Dividend for shareholders : A dividend is a token reward paid to the shareholders for their investment in a company's equity, taken from a part of company's net profits. Decision of amount of Retained profits : Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

12. Accounting vs Financial Management Accounting is generating, processing and analyzing financial information of an enterprise Financial Management is utilizing financial information for decision making

13. What are Cost, Price and Value Cost is typically the expense incurred for making a product or service. Price is what the market thinks something is worth and what we pay for it. - Value is what you think it is worth. Value is the utility of a good or service to a customer.

14. Responsibilities of Finance Manager

15. Financial Planning Financial planning is the process of documenting a business' current financial situation and identifying financial goals and how the business will achieve them.

16. Identification of Sources A source of finance, refers to where a business gets money from to fund their business activities. A business can gain finance from either internal or external sources.

17. The factors affecting the choice of sources of funds are the cost that it will incur to raise funds, the purpose and the duration for which the funds are to be raised and the risk that a company has to bear to raise those funds.

18. Investment of Funds Investment of fund is the decision to utilize money to make business .

19. Raising of Funds It is a financial investment in a Company by the owner or external personal for expansion, product development, assets purchase, and debt restructuring.

20. Bootstrap : Bootstrapping is the process of using own resources for a business. Crowdfunding : Crowdfunding is the process of using the audience of the World Wide Web to gradually raise small amounts of funding from a large amount of people. Angel investors : Angel investor is someone who has the capability to provide a large amount of funding . Venture capitalist : Venture capitalist buys equity of an entrepreneur, stays for a short period of time , and then exits with profits . Business Incubators : Business Incubators are the companies that assist startup owners with the necessary support. Startup accelerator : A startup accelerator, is a business program that supports early-stage, of growth-driven companies for a fixed period of time.

21. Protection of Fund Asset protection is about protecting the business assets from the threat of business liabilities , such as debt obligations, claims of creditors, claims for damages , liability, and misappropriation etc.

22. Protect Liability Every business entity needs liability coverage by insurance to protect them from injury claims . Data Security This applies to everything from a client’s credit card number to mailing lists to employee/patients’ information and intellectual property. Relationships with Suppliers it’s impossible to keep business running without suppliers of raw materials. It is important to keep relationships with suppliers positive. Safeguard Cash Reserves Cash can be slipped into a pocket and carried off without a trace. So, proper accounting is important.

23. Distribution of profits Profit distribution decisions - relating to the proportion of profits earned that should be retained to finance development and growth of the company and the proportion which may be distributed to owners as immediate returns .

24. Record Keeping of Financial Functions A Balance Sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity . It is a financial statements that are used to evaluate a business . It provides a snapshot of a company's finances ( what it owns and owes ). The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity . Balance Sheet

25. The balance sheet is divided into two sides (or sections). The left side of the balance sheet outlines all of a company’s assets . On the right side , the balance sheet outlines the company’s liabilities and shareholders’ equity .

26. Glossary of Terms in Balance Sheet Assets: An asset is anything of value or a resource of value that can be converted into cash . eg , hospital building, land, goods, machineries, equipments, vehicles, cash, investments, materials. Cash equivalents: Cash equivalents are any short-term investment securities with maturity periods of 90 days or less , eg , treasury bills, govt bonds. Inventory: Inventory is the raw materials used to produce goods, as well as the goods that are available for sale.

27. Accounts Receivable: Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Prepaid Expense: Prepaid expenses are future expenses that are paid in advance . On the balance sheet, prepaid expenses are first recorded as an asset . After the benefits of the assets are realized over time , the amount is then recorded as an expense . e.g. Advance Rent .

28. Investments: An investment is an asset or item acquired with the goal of generating income or appreciation . Appreciation refers to an increase in the value of an asset . Intangible Assets: An intangible asset is a non-physical asset that has a multi-period useful life. e.g. patents, copyrights, literary works, trademarks , and broadcast rights.

29. Liability: A liability is how much the hospital owes , recorded on the right side of the balance sheet. Liabilities are incurred in order to fund the ongoing activities of a business. Examples of liabilities are wages payable, taxes payable, loans , mortgages etc. Accounts Payable: Accounts payable (AP) are amounts due to vendors or suppliers for goods or services received that have not yet been paid for, shown as a liability on a company's balance sheet. It does not accrue interest .

30. Notes Payable: A note payable is a written agreement , when a borrower obtains a specific amount of money from a lender and promises to pay it back with interest over a predetermined time period. Accrued Expenses: Accrued Expenses are expenses that have been incurred and for which the payment has not yet been made . This expense is recorded in the expense book, but paid later. eg , taxes, commission etc Deferred Revenues: Deferred revenue is money received in advance for products or services that are going to be performed in the future . Advance money received for flat , before erection of building.

31. Equity: Equity measures the value of ownership . In other words, it's how much someone could get paid for selling something they own. Common Stock: Common stock, is typically the stock held by founders and employees . eg , share of a company. Additional Paid-in Capital Additional Paid in capital also known as Capital surplus, is the excess of amount the company receives over and above the par value of shares , from the investors during the time of an IPO. eg , share value 10 Tk , investors buy at 50 Tk per share.

32. Retained Earnings: Retained earnings are the cumulative profits that remain after a company pays dividends to its shareholders. These funds may be reinvested back into the business for expansion of business. Treasury Stock: A treasury stock is stock which is bought back by the issuing company from the public investors, reducing the amount of outstanding stock on the open market .

33. Cost-Effectiveness Ratio: A cost-effectiveness ratio is the net cost divided by changes in health outcomes . Examples include cost per case of disease prevented or cost per death averted. If Drug-A and Drug-B have CER of 15,000/- tk and 20,000/- tk respectively to save each life; than Drug A is preferred in economics. Glossary of Financial Terms

34. Cost–Benefit Ratio (CBR) A CBR is the ratio of the benefits of a project or proposal, expressed in monetary terms , relative to its costs.

35. Capital Expenditures Capital expenditures ( CapEx ) are funds used by a company to acquire, upgrade, and maintain physical assets with large investment of a permanent or long-standing nature. eg , property, plants, buildings , technology, equipment , etc

36. Depreciation: Depreciation is a way to calculate the reduction in value of an asset due to use, wear and tear, and obsolescence in course of time. The value of most assets decreases over time after their purchase. This loss is reflected as an expense. Medical Equipments: 5-7 years .

37. Revenue Centers A revenue center is a distinct operating unit of a business that is responsible for generating sales or income . OPD, IPD, Investigation Facilities, etc. Cost Centers A cost centre is a centre of activity to which incurs costs . Generally, every dept and facility of a hospital is a cost centre, which needs money for its operation and maintenance.

38. Cost In accounting term: Cost is the expenditure required to create and sell products and services , or to acquire assets. In economic term: Economic cost includes both the actual direct costs (accounting costs) plus the opportunity cost (The gain foregone by not choosing the next-best alternative decision). A student spends three hours and Tk 300/- at a movies the night before exam. The opportunity cost is time spent studying and that money to spend on something else. Standard Costing Standard cost is an estimated cost determined in advance of production or supply.

39. Direct Cost: Direct costs are the expenses a business incurs directly to make a product or service. Indirect Cost: Indirect costs represent the expenses of doing business that are not readily identified with a particular function or activity, but are necessary for conduct of activities . eg , administrative salaries , office expenses, rent, security expenses, telephone expenses, and utilities .

40. Overhead Cost Overhead costs refer to those expenses associated with running a business that can't be linked directly to creating or producing a product or service. eg , administrative cost, insurance , utilities, security etc. Operating Cost Operating cost is also called recurrent cost- the cost of operating an enterprise or service, that vary with level of output ( eg , quantity of drugs).

41. Fixed Cost Fixed costs remain the same regardless of whether goods or services are produced or not . Hospitals must maintain some basic staffs, physical facilities, bill for water, electricity, rent, taxes, depreciation, interest on borrowed capital etc and do not change whether there is production or not. Variable Cost: Cost that varies depending on the quantity of production . This means that variable costs increase as production rises and decrease as production falls.

42. Average Cost: It is the per unit cost of production obtained by dividing the total cost (TC) by the total output (Q) or mathematically expressed, AC = TC/Q Marginal Cost: The change in the total cost at a given scale of output , when a little more or a little less output is produced.

43. Rate Setting The process of determining how much to charge for a product . In rate setting, one usually considers expected expenses such as direct and indirect costs plus one's target profit . One may also consider other factors, such as competitors' prices, govt policy etc. Sometimes, rate setting is a means of regulating hospital rates is done by the health authority. Rate setting intends to prevent discriminatory pricing by providers, has the potential for significant and sustained cost containment .

44. Hospital Budget Hospital budgeting is the process of estimating proposed expenditure and the means of financing these expenditures. There are 3 types of budget.

45. Capital Budget : Capital Budget is a budget, allocating money for the acquisition of fixed assets such as land, buildings, machinery , real estate, new technology and equipment. Capital budgeting makes decisions about the long-term investment of a company's capital.

46. Cash Budget A cash budget is a company's estimation of cash inflows and outflows over a specific period of time. A company will use a cash budget to determine whether it has sufficient cash to continue operating over the given time frame. The cash budget typically consists of two sections , which include precise estimates of ( i ) cash receipts and (ii) cash disbursements .

47. Operating Budget An operating budget is typically formulated by the management team just prior to the beginning of the year , and shows expected day-to-day revenues and expenses expected for the entire year. eg , Depreciation

48. Operating Budget: 31 December 2021

49. Steps of Budget 1 st : Assumptions of quantitative output : Hospital Administrator will prepare assumptions, in statistical terms , about the kind of services (Outputs) the hospital expects to provide. e.g. patient days of service , number of procedures by depts (Operation, Radiology, physiotherapy etc), projected patient statistics, any additional services etc. 2 nd : Economic forecast : Hospital Administrator will prepare economic forecast, in respect of new developments , or other factors that can influence the hospital’s income or expenditure during the budget period (Like new services, specialist or super-specialist services, inflation, govt regulations etc).

50. 3 rd : Budget goals and policies : Hospital Administrator will outline the budget goals and policies as per the directives of the governing body, or board of trustees . With the support of Finance Officer , he will constitute a tentative financial plan , which will include financial strategy, target profit etc. 4 th : Budget Package : Finance Officer prepares a Budget Package, incorporating budgeting procedure to be followed, goals, policies , assumptions, schedules , and past data as applicable. He passes the budget package to all dept-heads to enable them to prepare preliminary departmental budget.

51. 5 th : Dept Expense Budget : The dept-heads prepare their expense budget, including departmental goals and policies, considering the departmental operations and performances . 6 th : Summary of Departmental Budget : Summary of each department’s budget-hearing takes place. After a joint analysis by Hospital Administrator, Finance Officer and HoD , departmental budget is prepared.

52. 7 th : Dept Revenue Budget : Finance Officer develops the dept’s revenue budget , summarize departmental expense budget , and forward the dept’s proposed budget summary to concerned dept-heads . 8 th : Operating and Cash Budget : Finance Officer prepares a preliminary Operating Budget for the whole hospital , by summarizing and collating the individual dept’s budget. Finance Officer also prepares a Cash Budget for the dept. If expected revenue does not cover the expense, Finance Officer may propose increase in price of services or cut some expenditures of depts.

53. 9 th : Preparation of total budget for entire hospital : Finance Officer will summarize the entire budget (Including capital, operating and cash budget) into a proper budget format, including statistical summaries. 10 th : Budget Approval : Budget is presented by the Finance officer to the Governing Board, or Board of Trustees or the finance committee for approval. If approved, is communicated to all concerned for its execution . Necessary follow-up is done to make any amendment.

54. Budgetary Control Budgetary control is a financial terminology for managing income and expenditure . In practice it means regularly comparing actual income or expenditure to planned income or expenditure to identify whether or not corrective action is required.

55. Budget Variances Budget Variance or variation is differences between forecasted budget and actual cost . The causes are as follows: -Changing economic conditions : Any changes to usual business conditions at the time of creating a budget can cause variances. eg , cost of raw materials might increase due to shortages.

56. -Accounting errors : Simple human error . eg , mathematical errors. -Inaccurate expectations : Over or understated expectations in terms of revenues and costs . -Employee fraudulence. -Changes to operations : Any changes in operational systems could lead to positive or negative budget variances. eg , new machinery that makes workflow more efficient. -Changes in Healthcare costs:

57. Causes of Increased Healthcare Cost Change in disease pattern due to life style changes . Shifts in patients demand ( eg , Preventive to Curative services) Increased competition for core patient services ( eg , MRI/CT Scan) Repercussions of any pandemic ( eg , ICU/HFNC in COVID-19) - The changing character of the service ( eg , Profit mongering) - Technology development ( eg , High tech equipments) - Changing health status ( eg , Increased heart diseases due to junk-food )

58. - Increasing proliferation of specialties and sub-specialties - Defensive medicine ( eg , Unnecessary Caesarean Section for delivery) Lack of awareness of economy and productivity Malpractices (Unnecessary diagnostics, privileges taken from Pharmaceuticals) Changes in global economy (Increase price of all commodities) Polypharmacy - Fear of malpractice lawsuits (Some doctors prescribe unnecessary tests or treatment out of fear of facing a lawsuit). Lack of information to patients .

59. Cost Containment Cost containment is the practice of controlling expenses , and allowing businesses to improve profitability and offering healthcare services at a reasonable price . Reduce cost of input resources. eg , L abor, and consumables. 2. Bulk purchase of raw materials. 3. Shared services , eg , laundry, diet, CSSD etc 4. Efficient Material Management . 5. Making better use of IT 6. Wastage control 7. Reducing operating expenses that don’t contribute to better care. 8. Diminishing redundancies in diagnostic testing 9. Ethical practices by the professionals

60. 10. Improve efficiency - Reduction of unnecessary staffs, machines, procedures etc - Elimination of duplications - Investment in capital expenditures reviewed thoroughly. 11. Reduce operation cost. eg , Energy conservation . 12. Volume reduction . eg , Reduce duration of hospital stay. 13. Emphasis on OPD services . 14. Eliminate pilferage . 15. Use of Cost-Benefit and Cost-Effective analysis.

61. 16. Value Engineering: Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality. 17. Developing in-house servicing and maintenance facility. 18. Good security and vigilance. 19. Develop cost-containment awareness among all staffs of hospitals.

62. Health Financing Problems in Bangladesh - Lack of fund : Proposed 5.4% of budget in heath for 2022-23 (WHO Recommend: 12-15%), which is only 0.84% of GDP (WHO Recommend: 5%; India: 2.1%) - Mal-distribution of resources - Raising cost of medical care - Inappropriate use of resources - Inefficiency in spending

63. - Lack of planning and coordination in health financing - Corruption. Absence of Health Insurance Mechanism . Out-of-pocket healthcare expenditures of households in Bangladesh comprise 64.3% share of the total health expenditure. Catastrophic healthcare expenditure (more than 10% of annual income) pushes 0.5 million into poverty every year in Bangladesh.

64. CONCLUSION Any public procurement in Bangladesh is regulated by Public Procurement Act-2006 and Public Procurement Rule-2008 to regulate transparency of financial activities. Financial Management is about managing and growing money. To ensure a best possible health outcome from limited resources, a strong financial management system in health sector is a must.

65. THANKS