Are you looking to dive deep into a hospital’s financial health, but feel overwhelmed by the complexity of financial statements? Fear not! In today’s blog post, we will demystify one of the most important yet often misunderstood financial reports – the statement of cash flows. This powerful tool provides valuable insights into how a company generates, spends, and manages its cash, making it easier for you to assess its liquidity, solvency, and growth potential. So, whether you’re a CEO, a Department Director, or just someone looking to expand your financial knowledge, this step-by-step guide is tailored to help you confidently navigate and analyze the statement of cash flows. Are you ready to become a cash flow pro? Let’s get started!
Step 1: Understand the Purpose of the Statement of Cash Flows
The statement of cash flows is a financial report that shows how a hospital generates and uses cash during a specific period. It helps stakeholders to understand the sources and uses of a hospital’s cash, assess its liquidity and solvency, and evaluate financial flexibility.
The statement of cash flows provides information about:
- Cash flows from operating activities
- Cash flows for investing activities
- Cash flows for financing activities
The term Cash flows refer to the movement of money into and out of the hospital, specifically through cash inflows and cash outflows. Cash inflows represent the money coming in, typically from patients, investments, loans, or other income-generating activities. Cash outflows, on the other hand, represent the money going out, such as for operational expenses, capital investments, debt payments, or other costs.
Step 2: Familiarize Yourself with the Structure and Sections of the Statement
The statement of cash flows is divided into three sections: operating activities, investing activities and financing activities. The purpose of each section is to provide information about how a company generates and uses cash during a given period.
A statement of cash flows is typically divided into three sections:
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Operating activities: This section shows the cash inflows and outflows resulting from the company’s core business operations, such as cash received from customers and cash paid to suppliers and employees.
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Investing activities: This section includes cash transactions related to the acquisition and disposal of long-term assets, such as property, plant, and equipment, as well as investments in other companies.
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Financing activities: This section reveals cash transactions with the company’s investors and creditors, such as issuing and repurchasing shares, borrowing and repaying loans, and paying dividends.
Step 3: Examine the operating activities
Start by analyzing the cash flow from operating activities. A positive cash flow from operations indicates that a company can generate enough cash from its core business to cover its expenses and invest in growth. Look for trends in operating cash flow over time to determine if the company’s operations are becoming more or less efficient.
Step 4: Review the investing activities
Next, examine the cash flow from investing activities. It’s common for growing companies to have negative cash flow from investing as they invest in assets to expand their business. However, if a company consistently has negative cash flow from investing without a corresponding growth in revenue, it may indicate poor investment decisions.
Some possible activities include:
- Acquisitions and dispositions of investments
- Cash transactions related to the acquisition and disposal of long-term assets
- Investments in other healthcare entities
Step 5: Assess the financing activities
Review the cash flow from financing activities to understand how the hospital is raising and using capital. Consistent positive cash flow from financing activities may indicate that a hospital relies heavily on external funding, which could be a concern for potential investors. On the other hand, negative cash flow from financing may indicate that a hospital is paying down debt or returning value to donors.
A consistent positive cash flow may indicate reliance on external sources of funding, which can be problematic if it’s difficult for you to obtain additional capital when needed (e.g., during an economic downturn). You should investigate ways to reduce reliance on external funding–for example, by increasing your own equity or cutting costs so that you require less outside money.
Step 6: Calculate the net change in cash position
Add the cash flows from operating, investing, and financing activities to determine the net change in the hospital’s cash position during the reporting period. A positive net change indicates an increase in cash, while a negative net change signifies a decrease in cash.
Comparing the net change in cash over multiple periods can help you identify trends in the hospital’s overall financial health.
Step 7: Compare the statement of cash flows to other financial statements
To get the complete picture of a hospital’s financial performance, compare the statement of cash flows to its balance sheet and income statement. This comparison will help you assess the hospital’s ability to generate cash, manage its assets and liabilities, and create value for patients and stakeholders.
- Balance sheet: A snapshot of assets and liabilities.
- Income statement: A record of revenues and expenses.
- Statement of changes in equity: A record of changes in shareholders’ equity
Step 8: Analyze the hospital’s cash flow ratios
Finally, calculate and analyze key cash flow ratios, such as the operating cash flow ratio, free cash flow, and cash flow to debt ratio. These ratios help you evaluate the hospital’s liquidity, solvency, and overall financial strength. Compare these ratios to industry benchmarks and competitors to gauge the hospital’s performance relative to its peers.
The operating cash flow ratio (OCF) is the amount of cash generated by operations divided by net income. This ratio tells you how much money a hospital has left over after paying its expenses, and it’s an important indicator of a hospital’s financial health. In general, a higher OCF indicates better performance because it means more money is being retained by the company to improve operations or pay down debt instead of being paid out as dividends or used to fund new projects.
A high OCF can be misleading if it doesn’t reflect changes in working capital levels–that is, if your hospital has recently increased its inventory or accounts receivable balances without increasing sales volume at the same rate. If this happens, then your reported net income may be artificially inflated because some revenue isn’t fully realized until later periods when customers pay their bills (or suppliers deliver goods).
Conclusion
By following these steps, you will be able to read and analyze a statement of cash flows for a rural hospital, helping you make informed decisions about its financial health and sustainability.
