Omega_Health_Foundation

Omega Health Foundation Trinette M. Landry FIN/HC571 October 11, 2010 Instructor: Moses Padilla Omega Health Foundation When doing a financial analysis of a business understanding the principles of finance and how, they relate to a certain company is important. Omega Health Foundation is a complex business with two hospitals, Omega and Able Memorial, plus a number of related medical service providers. All of the related entities are nonprofit with the exception of Omega Medical Management, INC (Cleverly & Cameron, 2007). Within this paper I will explain the principles of finance, compare and contrast net income and cash flow, compare and contrast market value and book value, address weaknesses and strengths, and recommendations for Omega Health Foundation. Principles of Finance Understanding the principles of accounting is a critical first step in understanding financial statements. However, the average reader may not be able to understand the format and language of financial statements. In finance, there are four basic principles {sic}: the balance sheet, statement of revenues and expenses, statement of cash flows, and statement of changes in fund balances or net assets. First, “the balance sheet and statement of revenues and expenses are more widely published and used than the other two statements. Understanding them enables a reader to use the other two financial statements and financial information in general” (Cleverly, Essentials of Health Care Finance, p. 164). The balance sheet essentially explains assets and liabilities that indicate the net assets of the organization at the moment of reporting. The formula most recognized when working with a balance sheet is Assets = Liabilities + Stockholders’ equity Second, the revenues and expenses statement or income statement that is better than the balance sheet and reports profit (or loss). Because it represents the wealth of the organization in its ability to pay for future and present debts. “To compute the operating profit, subtract from gross profit (1) the indirect costs associated with selling, general, and administrative expenses and (2) depreciation and amortization (which are noncash items) (Emery, Finnerty, Stowe, 2007). Third, is the statement of cash flows that generates the following three activities: 1) operating, 2) investing and 3) financing. These explain source changes in the cash accounts because of such events as depreciation and provision for bad debts. Cash flow does not always mean purchasing supplies or services it also includes debt items such as depreciation that is usually the largest item. Because depreciated items are not cash flow items, they must be added back into net income before they can determine the correct cash flow. Last, is the statement of changes in unrestricted net assets. These are situations, which there is a greater receipt of assets that outweigh OHF’s debts. In these situations the excess asset amount need to be identified as they are necessary to provide detailed accounting of where the funds are used because they are used outside normal debts. “Omega Health Foundation (OHF) operates using the four basic principles of finance. The balance sheet consists of all of OHF’s current assets as of 2009 is $186,594. “The statement of revenues ($170,324) and expenses ($170,816) represent operations in a given period better than a balance sheet does because it provides information concerning how that wealth position was changed through operations” (p. 175). Net Income and Cash Flow The differences between cash flow and net income is “cash flow is the money that flows in and out of the firm from operations, financing activities, and investing activities; whereas profit is what remains from sales revenue after all the firm’s expenses are subtracted” (Peavler, About.com:Business Finance, para 1). Net income is when an organization receives revenue in order to achieve funds (Finkler, Ward and Baker, 2007). Net income creates the method of collecting money therefore cash flow shows where the funds are routed. In simple terms one designs how to obtain the funds while the other reports how the funds are then spent. Market Value Verse Book Value “The market value is the price for which something could be bought or sold in a reasonable length of time. A reasonable length of time is defined in terms of the asset’s liquidity. The book value is a net amount shown in the accounting statements” (p. 2). There are four factors that affect and show the differences between market and book values and they are * Time of Acquisition – asset is recorded in the accounting statements at market value when item is initially purchased. * Inflation – During times of inflation the market value changes to reflect the current purchasing prices but the book price will remain the same at the time of purchase. * Asset’s Liquidity – Less liquid have higher transaction cost then more liquid assets. An example would be the purchasing of stock when the shares were low then being able to sell them when the stocks are high. * Tangible and Intangible Assets – Tangible asset would be equipment, building and more that in time could increase in value or decrease due to depreciation. Weaknesses and Strengths Within any company or organizations one will face some weaknesses and strengths throughout the operation. One weakness of OHF 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. This is a big increase within a year for building improvements that is very risky. Another weakness is that OHF has a substantial “due to third-party payers,” a current liability account, in both 2009 and 2008, this can affect the income of the organization. Recommendations When going through the financial information OHF seems to be well established but can still use some improvement is some areas. Management must look into lowering the cost of construction. There should always have a team looking for more investments for the organization. OHF should also focus on its financial position and decrease long-term debts. Conclusion Omega Health Foundation is a well structured organization. When operating an organization finance plays an important role in the success of the operation. Keeping an adequate record of the finance well always inform management of any problems and any potential problems that may arise. References Cleverly, O. W., Cameron, E. A. (2007). Essentials of health care finance (6th ed.). Sudbury MA: Jones and Bartlett. Emery, D.R., Finnerty, J.D., & Stowe, J.D. (2007). Corporate financial management (3rd ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Finkler, S. A., Ward, D. M., Baker, J. J. (2007). Essentials of cost accounting for health care organizations (3rd ed.). Sudbury, MA: Jones and Bartlett.