Faculty Practice Foundation
Finance 101
June, 2015
1
Session Objective
• Broaden member understanding of basic financial
principles
• Provide members with a general overview of
financial statements and how they are interpreted
2
Agenda
• Faculty Practice Foundation Overview
• Financial Statements
Objective of Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
• Case Studies
3
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 #’s
 Individual 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)
4
FPF Governance
(Revised as of March 2012)
Karen Antman
Dean BUSM
Members
Reserve
Powers
Kate Walsh
BMC CEO
FPF Board of Directors
BMC CEO
BUSM Dean
FPF CEO
Chair of Medicine
Chair of Surgery
2:
2:
3:
3:
Fam Med, Pediatrics, OB/GYN
Radiology, Pathology, Emerg Med
Opth, Urology, ENT, Ortho
Derm, Neurosurg, Neurology, Psych
William Creevy, MD
President & CEO
FPP Presidents
Department Chairs
Administrative Directors
Mary Chapin
Chief Administrative Officer
J. Lindstedt, VP Finance &CFO
J Camillus, VP Amb & Prof Svcs
C Charyulu, VP Revenue Cycle
FPF Administrative Staff
5
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 Directors
 May amend bylaws
 Approval of certain actions (reserved powers)
o Addition of new member
o Loan agreements / guarantees
o Agreement to sell, assign, convey, transfer a security interest or
mortgage or otherwise encumber the accounts or assets
o Merger, consolidation, reorganization, liquidation, dissolution of
the FPF or a sale of all or substantially all its’ assets
o Increase or decrease the number of Directors
6
Financial Statements
• Income Statement
• Balance Sheet
• Statement of Cash Flows
7
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
8
Income Statement
9
Income Statement
• Reports the “profitability” of operations
• Net income = “bottom line”
• Specific period of time
 Monthly
 Quarterly
 Annual (fiscal year)
Net Income = Revenue - Expenses
10
Income Statement – Generic Example
Generic Hospital - Income Statement
January 2015, Month to date
Operating Revenue:
Net Patient Service Revenue
Other Revenue
Total Operating Revenue
$550,000
100,000
650,000
Operating Expenses:
Salary, Wages, & Fringe Benefits
Provision for Bad Debts
Depreciation
Other Expenses
Total Operating Expenses
450,000
50,000
10,000
100,000
610,000
Income (loss) from operation
40,000
Non-Operating Gains (losses)
Total Non-operating Gains (losses)
Net Income / (Loss)
50,000
$90,000
11
Income Statement –
Net Patient Service Revenue (NPSR)
Gross Patient Service Revenue (GPSR)
Free Care
Contractual Adjustment
Net Patient Service Revenue (NPSR)
$1,170,000
(20,000)
(600,000)
$550,000
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
12
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)
13
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 collected
Depreciation
•
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
14
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
15
Income Statement –
Financial Indicators - Profitability
Ratio
Formula
Performance Implication
Operating Margin
Net Operating Income
Total Op. Revenue
Measures a company’s profit
after paying operating costs
Total Margin
Net Income
Total Op. Revenue
Measures a company’s net profit,
inclusive of both operating and nonoperating costs
Bad Debt %
Provision for Bad Debts
Total Patient Net Rev. or GPSR
Measures the % of collectible revenue
that has been lost
16
Income Statement –
Financial Indicators - Profitability
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*
* See slide 12 for reference
17
Balance Sheet
18
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
 Liabilities
 Equity
Assets = Liabilities + Equity
19
Balance Sheet – Generic Example
Generic Hospital – Balance Sheet
January 31, 2015
Assets:
Cash and cash equivalents
Patient Accounts Receivable
Prepaid Expenses
Total Current Assets
$1,000,000
300,000
200,000
1,500,000
Property, Plant & Equipment
Total Non- Current Assets
100,000
100,000
Total Assets
Liabilities and Equity:
Accounts Payable and accrued expenses
Total Current Liabilities
1,600,000
1,200,000
1,200,000
Long-term Debt
Total Non-Current Liabilities
250,000
250,000
Unrestricted net assets
Total Equity
150,000
150,000
Total Liabilities and Equity
1,600,000
20
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
21
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)
22
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
23
Balance Sheet
Financial Indicators - Liquidity
Ratio
Working Capital
Formula
Performance Implication
Curr Assets – Curr Liabillities
Identifies the dollar value of
excess assets (liabilities)
Current Ratio
Current Assets
Measures a company’s liquidity
Current Liabilities
or their ability to cover short term debt
*Asset > Liability = + Financial strength
Days in Patient
Accounts Receivable
Net Patient A/R
Indicates the number of days it takes
(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
24
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
25
Statement of Cash Flow
26
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 sections
1) Operating activities
2) Investing activities
3) Financing activities
27
Statement of Cash Flow – Generic Example
Generic Hospital – Statement of Cash Flow
YTD for period ending January 31, 2015
Cash flows from operating activities:
Patient accounts receivable
Accounts payable
Depreciation
Provision for bad debts
Net cash provided by operating activities
$ 120,000
(60,000)
70,000
20,000
150,000
Cash flows from investing activities:
Property, Plant & Equipment
Capital expenditures
Net cash used in investing activities
(110,000)
(20,000)
(130,000)
Cash flows from financing activities:
Long-term debt & capital leases
Net cash used in financing activities
(5,000)
(5,000)
Net increase (decrease) in cash
$15,000
Cash beginning of year
Cash balance period end
$ 985,000
$1,000,000
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Statement of Cash Flow
Impacting 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
29
Questions?
30
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31
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
32
Faculty Practice Foundation
Finance 101: Case Studies
2015
33
Case Study 1
Accounts 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
34
Case Study 1: Financial Statements
Balance Sheet - End of Year
Income Statement - End of Year
Operating Revenue
Net Patient Service Revenue
Other Revenue
Total Operating Revenue
$ 1,650,000
70,000
1,720,000
Operating Expenses
Salary, Wages, & Fringe Benefits
Provision for Bad Debts
Depreciation
Other Expenses
Total Operating Expenses
Income (loss) from operation
Non-Operating Gains (losses)
Total Non-operating Gains (losses)
Net Income / (Loss)
1,292,000
50,000
12,000
80,000
1,434,000
$
286,000
$
44,000
330,000
Assets:
Cash and cash equivalents
Patient Accounts Receivable
Prepaid Expenses
Total Current Assets
$
96,000
96,000
Property, Plant & Equipment
Total Non- Current Assets
$
Total Assets
Liabilities and Equity:
Accounts Payable and accrued expenses
Total Current Liabilities
320,000
320,000
446,000
446,000
Unrestricted net assets
Total Equity
$
Total Liabilities and Equity
$ 670,000
5.6
177.0
2.6
Other Metrics:
Unbilled A/R
% in A/R more than 90 days
$ 566,250
21%
911,000
145,000
145,000
Long-term Debt
Total Non-Current Liabilities
Financial Indicators:
Working Capital
Current Ratio
Days in Patient A/R
Days Cash on Hand
10,000
800,000
5,000
815,000
35
911,000
Case Study 1
Accounts 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?
36
Case Study 2
Cash 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
37
Case Study 2: Financial Statements
Income Statement - End of Year
Operating Revenue
Net Patient Service Revenue
Other Revenue
Total Operating Revenue
Operating Expenses
Salary, Wages, & Fringe Benefits
Provision for Bad Debts
Depreciation
Other Expenses
Total Operating Expenses
Income (loss) from operation
Non-Operating Gains (losses)
Total Non-operating Gains (losses)
Net Income / (Loss)
Balance Sheet - End of Year
$ 1,265,000
275,700
1,540,700
1,550,400
65,000
8,000
60,000
1,683,400
$
(142,700)
$
35,000
(107,700)
Assets:
Cash and cash equivalents
Patient Accounts Receivable
Prepaid Expenses
Total Current Assets
$
32,000
32,000
Property, Plant & Equipment
Total Non- Current Assets
$
Total Assets
Liabilities and Equity:
Accounts Payable and accrued expenses
Total Current Liabilities
90,000
90,000
565,000
565,000
Unrestricted net assets
Total Equity
$
Total Liabilities and Equity
$ 623,000
15.6
60.8
98.0
Other Metrics:
Unbilled A/R
% in A/R more than 90 days
$ 31,600
23%
697,800
42,800
42,800
Long-term Debt
Total Non-Current Liabilities
Financial Indicators:
Working Capital
Current Ratio
Days in Patient A/R
Days Cash on Hand
450,000
210,800
5,000
665,800
38
697,800
Case Study 2
Cash Surplus
Questions
• What could the practice do with the extra cash?
• What are the implications in relation to that
decision?
39