The financial analysis of a budget is examined to address its reality and possible achievements. Various tools, including profitability ratios, debt to equity ratios, current ratios, and inventory turnover measurement tools, are used to assess a budget plan in organizational setups.
The techniques apply equally across industries and companies, including the medical and hospital sections. Additionally, the liquidity and efficiency ratio will also be applied as a comparative analysis ratio to inform the relevance of technical and financial forecast planning. Based on these facts, the Hospital Authority of Clinch County’s annual monetary report is established to have a developed structure of comparison based on the statements of 2018 and 2019. Budget forecasts are generated based on former annual comprehensive reports, cash flow, and financial position statement accounts. Therefore, this paper will analyze the 2018 financial results of Clinch Hospital by applying financial approaches.
The year 2018 results for Clinch’s hospital financial performance provide the ground for possible budgeting of 2019 financial results. In this case, the year 2018 income statements’ profit margin ratio involves a percentage rate of 24% (Hospital Authority of Clinch County, 2019). The recognized percentage is considered a good key performance indicator for the business to increase its income budget for 2019.
However, the EBITDA margin ratio is 0.801, a situation that limits the budget expansion scale on the profitability side. In this case, a company comprehends its position in either increasing or stagnating its subsequent budget forecasts as the best ratio of the mentioned profitability ratio is one and above. Hence, in this particular scenario, the profit margin may indicate a positive performance and an increment of revenue targets in the subsequent forecasts. Nonetheless, the results of EBTIDA inhibit the whole idea of upscaling the revenues.
Moreover, the 2018 figures in the financial position statement indicate the 2019 budgetary plans of Clinch hospital. In this view, the variance between the payable accounts of 2018 and 2019 informs about a lack of forecast control on financial spending and a flawed analysis of the accounts payable turnover ratio. The ratio examines the possibility of a company addressing its short-term suppliers and payments.
In Clinch’s hospital case, the cost of sales will be considered as 9,591,000 USD as it is a service delivery company and not an inventory and product organization. Therefore, its ratio’s percentage expression of 25.44% is a good indicator for the year 2018. Nonetheless, it is not applicable for 2019 as the cost of sales and the payables for the year 2019 were also subject to reform. For instance, 2019 recorded 1,080,000 USD for the trade period against a possible of 377,000 USD for 2018 (Hospital Authority of Clinch County, 2019). In this scene, it is clear that the forecast required more than enough financial planning for a firm budget for the year 2019 from the analysis of 2018.
Moreover, basing the 2019 results on the budget estimates resulting from the 2018 financial statements on the income, cash flow, and financial position, the forecast’s estimation was overdone as financial ratios reveal. The liquidity ratio informs a company’s ability to pay off its short-term liabilities within a trading period, one year to be precise. The technique accommodates ratios such as current ratio, quick ratio, and day sales outstanding.
The mentioned approaches work well when the ratio or percentage expression of the information is higher. Thus, the higher the percentage, the better. Clinch’s current ratio for the year 2018 is 2.8, while the 2019 ratio was reduced to 1.9. The results are calculated based on the provided data in the statement of financial position of Clinch hospital. The year 2018 recorded a quick ratio of 2.6 and 1.89 for the year 2019. For the quick rate, the organization does not hold inventory as a sales company does.
However, it holds medicine supplies charged to its patients upon request (Hospital Authority of Clinch County – Financial Statements, 2019). These medical supplies are stored in the form of first-in, first-out (FIFO). Therefore, the medical stock has been considered in the inventory before calculating the quick ratio. The day sales outstanding cannot be estimated as the statements lack accounts receivable balances (Hospital Authority of Clinch County – Financial Statements, 2019).
Based on the quick and current ratio findings, the statement for 2019 reflects a weak forecast based on 2018’s financial results. The difference between net revenue and payables in the statements of 2019 and 2018 reflects the quick and current ratio results. Furthermore, the company is much weaker in 2019 than in 2018 when addressing the liabilities clearances, as shown by the above results of the liquidity ratios. Thus, the liquidity ratio technique of comparing 2018 and 2019 financial positions is informative in the budgeting of both the cost and the income segments of financial statements.
Additionally, before any budgeting figure is approved there is a need to assess a company’s financial efficiency in generating funds and settling its current liabilities in a given financial year. The efficiency ratios inform budget limits for managing cost apportionment, cost allocation, and revenue estimation.
The technique regulates cost allocation and cost management based on revenue forecast. In this case, the income of an entity is the drive and determinant that directs the cost management of the organization in the quest. For Clinch Hospital, the efficiency ratio for 2018 was 0.23, and for 2019’s was 0.45. In this analyzed position, the comparison between the 2018 and 2019 results is evident in the company’s estimation of expected revenue for the year 2019. However, the single technique cannot be reliable for accurate information on managing resources and expected business volumes in a trading period.
In conclusion, the anticipated budget for 2019 in Clinch hospital is based on the past figures of 2018, which are audited reports and, therefore, qualified for any analytical use. The use of profitability ratios in analyzing the 2018 primary figures, considering the budget for 2019, reveals a weak forecast indicated by the low gross and net income generated for 2019. For instance, the profit margin ratio signaled a positive move of 24% ratio analysis, but the 0.801 ratios from EBTIDA refute the whole idea of increasing target profits and incomes. An additional analysis of the accounts payable turnover ratio of 25% for the year 2018 indicates a weak move in income forecasts and limits the planning of cost of sales.
Moreover, the liquidity and efficiency ratios are contrary to each other. The two no longer indicate a common objective concerning revenue targets and the management of Clinch’s liabilities. For instance, the quick ratio shows a reduction of 1.89 from 2.6 for 2018 and 2019. In contrast, the efficiency ratio’s growth of 0.45 from 0.23 in 2018. These results require the support of financial ratios for stable forecasts of any budget. Generally, the budget is weak, and it indicates poor planning when adequately analyzed.
Reference
Hospital authority of Clinch County – Financial statements (2019). Clinch Memorial hospital. Web.