Omega_Health_Foundation_Paper

Omega Health Foundation Paper Andrea Watts FINHC 571 April 26, 2010 Facilitator: James Traylor The purpose of this paper is to evaluate the finances for Omega Health Foundation. In reviewing the financial statements for Omega Health Foundation, I will explain principles of finance and how they relate to the Omega Health Foundation’s financial position. I will compare and contrast net income and cash flows, compare and contrast market value and book value of the assets, address the weakness and strengths, if any, of Omega’s financial position, state recommendations that I would make to strengthen Omega’s financial position, and I will state any additional information to further evaluate Omega. Principles of Finance The Omega Health Foundation is a business with two hospitals and other related service providers. Unlike other organizations, Omega Health Foundation is a complex business. There are principles of finance that relate to Omega Health Foundation. According to (n. d.) “The principles consist of risk-return tradeoff, liquidity versus profitability, matching principle, leverage, time value of money, and valuation” (The eight principles of accounting, para 1). The risk-return tradeoff refers to the higher the risk investment, and the higher the expected return must be. Liquidity versus profitability occurs when there is a difference between liquidity and profitability, thus gaining more of one that means giving up some of the other. The matching principle should involve Omega Health Foundation assets matching the organization liabilities. The short-term assets should be financed with short term liabilities and long term liabilities should be financed with long term financing. Leverage is a measure of earnings that develops from acquiring fixed costs in the company. Time value of Money involves an investment that will earn a return over a length of time. Using Time value of Money is very beneficial to Omega Health Foundation because a dollar earned today and invested will provide a return of profit in the future. Valuation allows Omega Health Foundation to present value of cash flows. Because Omega Health Foundation is complex, it is very critical to understand the principles of finance and the effects for Omega Health Foundation. Net Income and Cash Flows When comparing and contrasting net income and cash flow, there must be a good understanding of what each term mean. “Net income represents total revenues greater than total expenses and cash flows represent cash receipts and cash payments” (Bamber, Harrison Jr. & Horngren, p. 18). Omega Health Foundation net income was less in 2009 than in 2008. “The decrease in accounts payable can use cash and reduce cash flow” (Cleverly & Cameron, 2007, p. 178). Omega Health Foundation has a statement of cash flows outlining the operating activities, investing activities, and financing activities. “Omega Health Foundation derived $23, 878,000 of cash flow from operating activities during 2009” (Cleverly & Cameron, 2007, p. 178). Because Omega Health Foundation spent money for financial activities during 2009, the difference is the net increase in cash. Statements of cash flow are very useful and beneficial for a growing company such as Omega Health Foundation. Market Value and Book Value In terms of market value, it is the price for which a person could buy or sell a share of the stock. “Omega Health Foundation Book value is the amount of owner’s equity on the company’s books for each share of its stock” (Bamber, Harrison Jr. & Horngren, p. 520). In reference to Omega Health Foundation, if the organization has both preferred stock and common stock outstanding, the preferred stockholders have the first claim to owner’s equity. For Omega Health Foundation, book value is important in decision-making because book value may figure into the price to pay for a closely held organization. Weaknesses and Strengths One weakness of Omega Health Foundation is the capital risks taken by applying $84,015,323 toward building improvements in 2009. This increases construction efforts that cost $55, 478 in year 2009. These improvements are risky and are not in the best interest for Omega Health Foundation. Another weakness for Omega Health Foundation is that the foundation was more liquid in 2008 than in 2009. The purpose of liquidity is to measure closeness to cash, which is the most liquid asset. A strength of Omega Health Foundation is that the organization is willing to take the necessary steps to improve financially. Recommendations One recommendation that I propose for Omega Health Foundation that would strengthen the financial position would be to decrease long-term debt. The less money going out for debt hinders the financial position by preventing income to remain within the foundation. Another recommendation is for Omega Health Foundation to focus on uncollectable accounts. The benefit to focus on uncollectable accounts would allow Omega Health Foundation to increase revenues and profits. Another recommendation is for Omega Health Foundation to look at financial ratios to make decisions. The ratios would involve measuring ability to pay current liabilities, measure ability to sell inventory and collect receivables, measure ability to pay long-term debt, measure profitability, and analyze stock as an investment. Using these measurements allows Omega Health Foundation to evaluate their performance. Conclusion In conclusion, Omega Health Foundation has some obstacles to overcome. Based on my recommendations, Omega Health Foundation will be more financially prepared when making decisions. Understanding balance statements, statement of revenues and expenses, statement of cash flows, and statement changes in unrestricted net assets will allow Omega Health Foundation to remain a stable and successful organization. | | | | | | | | | | | | References Bamber, L. S., Harrison Jr, W. T., & Horngren, C. T. (). Accounting (6th ed.). Upper Saddle River, New Jersey: Pearson Prentice Hall . Cleverly, O.W., & Cameron, E.A. (2007). Essentials of health care finance (6th ed.). : Jones and Bartlett (n.d.). Principles of finance. Retrieved from http://www.campus.murraystate.edu