Full Assign (1)

BWFF 3193 SEMINAR IN FINANCE

INTRODUCTION

In this case study, we will start by summarize the main issues in Community General

Hospital and affirm the ongoing problems faced by the hospital. Root causes have

been explained in details. SWOT analysis also included in order to identify its

problems specifically and obtained high percentages of success in fulfilling their

goals.

The issues of the hospital can also be determined by evaluation through

financial ratio analyses from the view of profitability, solvency and the movement of

cash flow over the years. Some solutions will be recommended based on the issues by

giving alternatives that had been proved and succeed by other health care industry.

A complete strategy planning will also be included into this case study.

Besides, pro forma statements also provided to Community General Hospital on how

to recover bad debt by increasing revenue. This statement gives a concept for the

hospital to understand its own real situations and achieve its financial goals in the

future. Finally, as a financial consultant, several recommendations on the best solution

and views on its future prospects will be given.

In my opinion, the manager did not upgrade the hospital’s facilities at the

suitable time such as trained their staff’s management knowledge. Besides, they

wasted a lot of money in acquiring different administrators to cover their ongoing

problems. However, the dire financial situation of the hospital became worse than

before.

Last but not least, the lack of knowledge in financial risk management also

caused the Community General Hospital into financial distress. Without proper

financial risk management it may lead to operational risk, credit risk and liquidity

risk. Operational risk is the risk of loss resulting from inadequate or failed internal

processes, people and system or from external events such as World War II in this

case. Besides, credit risk is economic loss from the failure of counterparty to fulfil its

financial obligation. For instance, some of the patients did not pay their medicine fees

due to poverty. Liquidity risk is the inability to manage unplanned decreases or

charges in funding sources. From this case, we can see that the hospital was suffering

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fund deficit but it still purchased new equipment and installed new facility. Because

of this, the bad debts increased and it leaded to liquidity risk eventually.

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CASE SUMMARY

Dr. Noland Wright was nominated as a new manager of Community General

Hospital. He is expert in medicine, not business. Whittaker Memorial Hospital was

initial name for Community General Hospital in year 1914 which known as

community-run hospital and serving the black population in Virginia. The hospital

used federal funding to extend more facilities and scope to meet the synchronization

of an economic expansion during World War II. In 1950’s and 60’s, the prosperous

business come to the hospital. In the meantime, the hospital was threats to admit black

patients to move on well-equipped and comfortable ‘white’ hospitals in the area. It

made the civic organization began concerned for the hospital survival.

The hospital’s reputation was started to be worse, it affected by quality of the

health care. City Of Newport News will not fully responsible with the whole of

hospital’s costs, it just a help in small part of costs. In 1970’s, the hospital took

advantage on emergency fund which set up by the city. In that 1970’s decade, debts

became worse; the hospital suffers a lot with those losses. After 1982, patients had

right to prefer the quality of facility in the hospital. Thus, they change the hospital

name to Community General Hospital and equip lots of new facilities. They issue

bonds and money in community pledge to allow the hospital survived. However, the

deficit became worst throughout the year 1984. Private healthcare management firms

keep searching for help however it just persists in short-lived. In year 1985, the

hospital import new facilities and score a higher occupancy rate.

Therefore, they were seven different administrators take charge of the hospital.

The losses became even worst after year 1985. They tried to convince the hospital’s

supporters to overcome the problems. They have tried many ways included political

avenues but it has failed. Be driven desperate, they think to sale the hospital to

doctors’ investment group. The idea was rejected by the hospital’s supporters. By

1990, they come to an agreement to file for bankruptcy because the overwhelmed of

the debt. In year 1993, the hospital declared bankruptcy petition, relevant persons

would be implicated.

(354 words)

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PROBLEMS

Based on the case study, Dr Noland Wright is graduated from medical study not

business study. Furthermore, he has recently taken early retirement. In this situation,

he is not suitable been responsible in administration aspect to manage the hospital

financial problem because lack of experience and expertise. It will bring inactive

administration to the hospital. The hospital is in critical situation, so it is difficult to

develop a plan and make the needed financial decision done by Dr. Noland Wright.

Hence, the hospital needed a professional financial planner to help in planning

profitable proposal and making good financial decisions. As we can say that, financial

future is very important which will affect the whole hospital’s future gone into

collapse, if the authority cannot manage well. Inactive administration of the hospital

can also shown in between year 1979 and 1985 that seven different administrators had

been in charge of the hospital but ultimately did not bring any profit and beneficial to

the hospital. They did not make successful decision to cut the expenditures and losses,

instead of continued difficulty in retaining continuous management.

Secondly, Community General Hospital did not focus in debt management.

The management team of the hospital did not expert and even having any knowledge

on debt management. Thus, the losses and debts became more and more serious until

it forced to grant its bankruptcy petition in year 1993. For example, the hospital

started suffered losses and debts. The management team could not solve this financial

problem immediately and effectively, and it brought to another budget deficit of $402,

000 in year 1983. This showed that they did not know how to do cash budget until

finally came to budget deficit. They bought a lot of new facilities and equipments to

expand the hospital without thinking of the ability of hospital. This is a big

expenditure and it is a waste of money to the hospital since these facilities and

equipments were unnecessary. Besides that, the solutions that done by the hospital in

term of administrative and financial did not provide any help to the hospital for

mitigate the rigorous financial situation. At the end of 1984, the fund deficit was

$749,000 and it was continued losses after 1985. The worst debt was in excess of $20

million by 1990. All the debts, fund deficit and budget deficit illustrate that the

hospital did not has effectiveness and efficiency in debt management and finally, it

caused to bankruptcy.

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Thirdly, the hospital also faced image issue since there was desegregation

movement in year 1960. The black population can admit to the “white” hospitals

which have large and better equipped facilities. Before that, it was a community-run

hospital serving the black population and in 1950’s and 1960’s the hospital enjoyed a

busy business in the segregated health care industry. However, it was experiencing a

falling reputation and started suffered from losses in year 1970. This is because the

black population has various types of choices other than seek to “black” hospitals

such as Community General Hospital. Due to falling census for the hospital, the

quality of medicine and nursing service fall and resulting to deteriorate reputation.

ROOT CAUSES

Community General Hospital suffered financial distress for a long period is due to

several root causes. One of the main root causes is World War II. During World War

II, Community General Hospital enlarged its facilities by using federal funding in

order to meet the needs of an economic expansion of the community. The

desegregation movement in 1960’s bought some imperils. Most of the patients were

moved to better-equipped traditional ‘white’ hospitals in the area.

There was already existed a financial problem in the hospital before Dr.

Noland Wright was appointed as manager of Community General Hospital. Since Dr.

Noland Wright did not has financial background and was only training in medicine

the financial management of the hospital was getting into the worse position. As a

consequence, the hospital suffered losses and bad debts. Between 1979 and 1985,

Community General Hospital was in charged by seven different managers. However,

the hospital continued losses after 1985 and they failed to seek solutions to solve the

ongoing problems. While some plans were suggested, they failed to access and

rejected by the hospital’s supporters.

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SWOT ANALYSIS

Community General Hospital has several strengthens, weaknesses, opportunities and

threats that provide evaluation for the hospital’s financial performance. The SWOT

analysis begins by identifying the internal strengthens and weaknesses of the hospital

as well as the external opportunities and threats that affected the hospital. All potential

issues will be discussed in order to seek solutions for the ongoing problems.

Community General Hospital is one of the community-run hospitals that

served the black population of Newport News in Virginia. Virginia is such a strategic

place with high population that provides medical services for the nearby residents.

During World War II, the hospital extended facilities and scope through federal

funding because of the enhancement of commercial activity in order to meet the

economic expansions of the community. This alternative had been provided

competitive advantage for CGH emulates to their competitors. Apart from that, the

hospital also acquired reliance from the American College of Surgeons in 1940’s. The

accreditation gained by the hospital would enhance its reputation directly. It also

attracted more customers to receive treatment in hospital. Therefore, in the 1950’s and

1960’s, Community General Hospital experienced the bustle business in the

segregated health care industry.

The weakness of the hospital is difficulty in seeking some experienced

managers in charge of the suitable position. Dr. Noland Wright was a new appointed

manager of Community General Hospital to control its financial condition. However,

he was training in medical not in business management. Consequently, he may get

confused with the financial situation that he did not experienced before. In 1982, the

civic board that guided the hospital became inactive. There had been seven different

administrators had been employed between 1979 and 1985, however, they unable and

faced difficulty in overcome the ongoing problems of the hospital. Meanwhile, they

faced difficulty in convince the hospital’s supporters to find alternatives to its dire

financial position. Although there was an opportunity for the hospital to survive by

selling it to a doctor’s investment group, the hospital’s supporters refused to make

deal with them.

There were several threats that Community General Hospital has to solve.

With the advent of the desegregation movement in 1960’s, a lot of the black

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physicians were moved to better-equipped traditional ‘white’ hospital due to their

higher desired for better services they had access to. Therefore, the numbers of

patients were declined which affected the profitability of the hospital. A deteriorating

reputation also affected the quality of its health care to the public. The deterioration of

its reputation, patients may reluctant to gained treatment from the hospital because

lack of confidence to its services provided. Some of the suppliers began demanding

cash payment for purchases so they may lack of liquidity to increase its fund that

would aid the hospital to survive. Last but not least, after the desegregation, the

competitors of Community General Hospital were increased. Patients would have

more options to choose the better equipped hospital. Therefore, the competitive

models of healthcare delivery would force patients to receive care in better or modern

hospital instead of their local facility.

After analysis the external threats, some external opportunities would help

CGH for future development. The civic organization that governed the hospital began

to concern about the survival of the hospital. While the City of Newport News was

willing to aid, it was unable to obtain fully responsibility for the cost of hospital. In

1970’s, the hospital applied for emergency fund that set up by the city to alleviate the

hospital’s financial situation. With a new facility, new location and future change of

name from Whittaker Memorial Hospital to Community General Hospital, it would be

an opportunity to give a brand new look for the patients that would help the hospital

to survive. Besides, the hospital also issues $15 million bond and $1.5 million from

community pledges in order to continue its operation. Political solutions for

Community General Hospital were tried with some success, but ultimately, unable to

help the hospital’s condition. Since the main problem of the hospital was held

internally, external alternative such as political avenues would not able to settle down

the long term financial situation of the hospital.

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FINANCIAL RATIO ANALYSIS

From the financial statements provided, we may analyze the financial condition of

Community General Hospital in view of profitability, solvency and cash flow.

Formulas of the items below are attached in Exhibit 1.1.

A) Profitability

There are three measures in evaluates profitability, profit margin, return on asset

(ROA) and return on equity (ROE). In the income statement from 1994 to 1995,

the total non-operating losses were declined from $908,502 to $876,817. This

shows that overall profitability of the hospital was steadily deteriorate although

its revenue was increased to 10.1 million in 1995 from $8.9 million in 1994.

i. Profit Margin

It is mostly used for internal comparison. A low profit margin indicates a low

margin of safety which means higher risk that a decline in sales will erase profits

and result in a net loss, or a negative margin. Profit margin is an indicator of a

company's pricing strategies and how well it controls costs. Differences in

competitive strategy and product mix cause the profit margin to vary among

different companies. It showed negative for both 1994 and 1995. It means that the

percentage of losses decreased which is from -0.0883 to -0.0664.

ii. Return on Asset (ROA)

ROA is a measure of profit per dollar of assets. In 1994, ROA was -0.0743 and

the amount increased to -0.0636 in the next year. The assets were declined from

$10.6 million to $10.5 million between 1994 and 1995, so that the ROA also

increased. Although CGH had high asset turnover, the poor management by Dr.

Noland was led the hospital to bankruptcy in 1996.

iii. Return on Equity (ROE)

ROE is a measure of how the stockholders fared during the year. Our financial

goal is maximizing shareholders’ wealth. ROE in accounting perspective is the

true bottom-line measure of performance. The ROE in 1994 is 0.0497 and

declined to 0.0419 in 1995.

B) Solvency

For solvency, it divides into short term and long solvency measures. Short term

solvency includes current and quick ratio; for long term, it consist of total debt

ratio, debt to equity ratio long term debt ratio and equity multiplier.

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Short Term

i. Quick Ratio

Quick ratio is a measure of a company’s liquidity and ability to meet its

obligations. It is also known as acid-test ratio and viewed as a sign of company’s

financial strength/weakness. The higher the ratio, the stronger the company’s

financial condition. There is an increase in quick ratio which is 0.5414 in 1994 to

0.6413 in 1995. Since the quick ratio of the hospital is lower than 1, the hospital

was faced a bad period which unable to pay off its current debt.

ii. Current Ratio

Current ratio is measure of short-term liquidity. The current ratio is an indication

of a firm’s market liquidity and ability to meet creditor’s demand. If the current

ratio is too high, then the company may not be efficiently using its current assets

or its short-term financing facilities. This may also caused problems in working

capital management. We can say that low current ratio may not be a bad sign for

a company with a large reserve of untapped borrowing power. Current ratio

showed an increase in 1994 which is 0.6022 to 0.6754 in 1995, which the hospital

still able to payback their debts in short-run.

Long Term

i. Total Debt Ratio

Total Debt Ratio is the ratio that into account all debts of all maturities to all

creditors. The total debt ratio increased from 2.4952 in 1994 to 2.5172 in 1995.

They tried different ways to get fund in order to continue its hospital operation.

Therefore, its debts were increasing year by year.

ii. Debt to Equity Ratio

Debt-equity ratio is a measure of a company's financial leverage. Typically the

data from the prior fiscal year is used in the calculation. Investing in a company

with a higher debt-equity ratio may be riskier, especially in times of rising

interest rates. It is because the additional interest has to be paid out for the debt.

Debt-equity ratio showed an increase from 1994 to 1995 which are -1.6688 and -

1.6591 accordingly. This means that the hospital had been financing its growth

with debts. The desegregation in the 1960’s bought the hospital into fund deficit

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conditions until 1995. However, these conditions still not recover yet by getting

emergency fund from the city in 1970.

iii. Long Term Debt Ratio

Long-term debt ratio is a way to determine a company’s leverage. The greater a

company's leverage, the higher the ratio. In general, companies with higher ratios

are considered to be more risky because they have more liabilities and less equity.

This ratio increased from 3.5887 in 1994 to 3.6771 in 1995. The hospital’s

current liabilities were improved to $4.5 million in 1995. This is due to the

hospital demand borrowing in 1994 and started note payables with $40,000.

iv. Equity Multipliers

Equity multiplier was increased from -0.6688 in 1994 to -0.6591 in 1995. The

equity multiplier ratio is used to measure a company’s total assets against

stockholder’s equity. It provides a way for investors to examine the level to

which a company uses debt to finance its assets. A high equity multiplier

indicates a more highly-leveraged company. The equity multiplier is like other

leverage ratios. It can help investors to determine whether a company is heading

for financial problems due to an excessive debt load.

C) Cash Flow

In the statement of cash flow, cash flow at the beginning of year is $193,907 in

1994 and end up with $791,893 for a net increase of $597,986. By 1995, cash

flow at the beginning of year is $791,893 while cash flow at the end of year is

$577,461. The net decrease in 1995 is $-214,432.

As we can see, the cash flow from operating activities in 1994 is cash

inflow which is $752,930. Expenses and losses in excess of revenues and gains in

1994 are cash outflow. However, the cash flow from operating in 1995 is cash

outflow which is $461,838. Expenses and losses in excess of revenues and gains

in 1995 are negative or cash outflow. The uses of cash are greater than sources of

cash in operating activities. The cash flow from investing activities is cash

outflow in 1994 and 1995 which are $-154,944 and $-55,258 accordingly. In

1994, there is no cash flow in the cash flow from financing activities. In 1995, it

shows cash inflow from financing activities which is $13,893. To conclude, the

net increase of cash and equivalents in 1994 is $597,986 but it decrease to $-

503,203 in 1995.

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SOLUTIONS TO THE PROBLEM

After analyzing the problems that faced by Community General Hospital in the case

study, as a consultant, we need to find out solutions to overcome the problems.

For the problem of inactive administration, we need to restructure the

organization according to the ability of employees. Restructuring is the corporate

management term for the act of reorganizing the legal, ownership, operational, or

other structures of a company for the purpose of making it more profitable, or better

organized for its present needs. As a risk management consultant of the hospital,

executives involved in restructuring often hire a professional financial planner to

assist in the transaction details and negotiation as well as manage the financial

problem. It may also be done by a new financial planner hired specifically to make the

difficult and controversial decisions required to save or reposition the company. It

generally involves financing debt, selling portions of the company to investors, and

reorganizing or reducing operations. In addition, restructuring the hospital can depend

on the talent of employees. Employees can assign the work according to their ability.

For example, employee who has advantage of his potential in management can assign

him to administration department whereas employee who talent and hardworking in

the part of look after people can assign his to nursing work.

There are several steps in the restructuring process; firstly, ensuring the

hospital has enough liquidity to operate during implementation of a complete

restructuring. Secondly, we need to produce accurate working capital forecasts.

Thirdly, we need to provide open and clear lines of communication with creditors

who mostly control the company's ability to raise financing. Fourthly, updating

detailed business plan and consideration. Apart from that, the hospital needs to set up

two ways conversation between employer and employee. It is necessary to build a

closer employer-employee relationship in the hospital so that everyone can understand

each other well. Employer must always concern about the well being and matter of

the employee whereas the employee must always obtain the latest news from the

upside management. Employer can provide either financial reward in term of bonus

and initiative or non-financial reward in term of praise.

For the problem of image issue, first thing that the hospital should do is

rebuild reputation to attract attention and confident again from the public and patient.

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The hospital should fulfil its obligation through making social responsibility. Social

responsibility is one of the newest management strategies where companies try to

create a positive impact on society while doing business. All companies have a two

point agenda to improve qualitatively (the management of people and processes) and

quantitatively (the impact on society). The hospital can do the social responsibility by

two methods, there is either doing the whole thing by itself or cooperate with other

counterparty. Doing whole thing by itself is means the hospital has the ability to finish

one matter by itself without having help from other party. For example, Community

General Hospital can organize blood donation in whatever places for the convenience

of the public and donator under the condition of having a moveable ambulance. The

hospital also can assign a few volunteer doctors and nurses go to rural village and old

folk’s house to provide free medicine. Besides that, the hospital can collaborate with

other hospital or institution to organize grant civic event in order to increase the

hospital’s reputation and save cost. Community General Hospital can take reference

from Hospital Corporation of America (HCA) in the matter of fulfil social

responsibility that HCA modified its policies to provide a discount to uninsured

patients who do not qualify for Medicaid or charity care on January 1, 2005. These

discounts are similar to those provided too many local managed care plan.

Community General Hospital can also provide a friendly service and comfortable

condition to attract patients. It can increase the revenue of hospital and fulfil its social

responsibility. Indirectly, it can increase the hospital’s name and reputation as well as

attract the capital injection from investors.

After observation the financial statement of the Community General Hospital,

it usually can divide into two major conditions which it was faced such as financial

and managerial problem. To overcome these problem, there are several solutions can

recommend to the hospital.

Through the financial problem, Community General Hospital was insisting to

face the bad debts condition especially substantial increasing from $ 278,389 in year

1994 to $ 544,602 in year 1995. The income statement was strongly showed that

Community General Hospital was lack emphasize on debt management. Bad debt

occurred when the hospital failed to collect the payment from the patient. To reduce

the collection risk, Community General Hospital can co-operate with the insurance

company by introduces the insurance policy to patient for buying medical card. This

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is a win-win situation for that party related because insurance company can increase

their range of customer and receiving good respond from the customers when hospital

recommend insurance policy to their patients. For hospital, the amount of bad debts

can be reduced through the patients who have the medical card because the payments

are covered by the insurance company. Revenues will be increase due to reduce the

bad debt.

Besides that, the successful way of Hospital Corporation of America (HCA) to

increase revenue can be the reference and role model to the Community General

Hospital. For instance, Community General Hospital can provide a discount to the

uninsured patient who does not have Medicaid or charity care. It will be a competitive

advantage of the hospital to attract more patients. The incident of Hospital

Corporation of America (HCA) has proven the way is successful after launched the

new policy on January 1, 2005, the revenue of HCA hospital is having increased. This

is shown at Exhibit 2.1.

Facility and equipment are the assets of the hospital. Since the Community

General Hospital had purchased new facility and equipment, it can use the assets to

generate more income to the hospital. In private hospitals, they usually rent out their

operating room to another doctor to do the surgery due to the facilities and

equipments are more sophisticated. Hospital also can sell the useless equipment to

another party as a source of hospital’s income. But it will not be the proper way to

generate income in long-term financing, because the primary income resource of

hospital is generated from patient by giving the services not selling the equipment.

In additional, increase of the operating expenditure will reduce the hospital’s

revenue. Due to this, Community General Hospital can try to find the nearest medical

supplier to reduce the operating cost such as transportation cost. For instance, if the

supplied medicine product is originated from overseas, hospital will need to pay more

for the shipping cost and exchange currency rate medication. It will burden the

transportation cost. Furthermore, it also needs external cost pay to the bank to get the

letter of credit when trade with other company in overseas.

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STRATEGIC PLANNING

In today’s highly competitive environment, budgeting-oriented planning or forecast-

based planning methods are needed for a hospital to survive and prosper. Strategic

planning used to determine where a Community General Hospital is going over the

next 10 years (1996-2005), it is help to define objectives and assesses both the

internal and external situation to formulate strategy, implement the strategic, evaluate

the progress, and make adjustment as necessary to stay on track.

Mission & Objectives

To provide and enhance accessible, comprehensive health-care services to our

community that is quality-driven, customer-focused and cost-effective.

To champion innovation and performance improvement

To deliver a safe, quality and patient centred hospital care.

Vision

Be the Provider of Choice for the Community.

Be the Employer of Choice for Our Staff.

Be the System of Choice for Our Medical Staff.

Values

Integrity - We act openly and truthfully in everything we do.

Collaboration - We work together cooperatively in contributing to the development of

a high-performing exceeds what we can accomplish individually.

Caring - We treat those we serve with concern, kindness and respect.

Innovation - We believe that new ideas and timely access to information will lead to

better health care.

Health-focused - We are guided by the health needs of our population and our

communities.

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Evidence-based - We use the best available evidence and experience in making

decisions.

Trusted- We act in a way that engenders trust and respect among members, partners

and our staff.

ENVIRONMENTAL SCAN

This strategic planning has been developed to accomplish to our vision, mission and

values with long and short term goals and objectives. This is our strategic priorities

for a ten-year period, and it will be updated annually. The environmental scan

included three components such as internal analysis to the firm, industry analysis and

PEST analysis which are political, economic, social and technological environment

constantly influence and change dynamic environment.

The Environment of Community General Hospital

Environmental factors internal to the hospital usually can be classified as strengths (S)

or weaknesses (W), and those external to the hospital can be classified as

opportunities (O) or threats (T). Such an analysis of the strategic environment is

referred to as a SWOT analysis. There are numerous internal factors in this plan,

including:

Evaluating performance by Health care providers in quantitative information.

Quality and patient safety have emerged as major priorities for hospitals,

insurance companies and the general public.

Increasing the demand from residents there for our hospital because of

Virginia demographics point to a growing and aging population.

Community General Hospital existing care infrastructure is adequate in

1940’s. This results in access to the appropriate level of care and decreases

costs.

There are shortage of skilled workers and healthcare workers in Community

General Hospital.

Ability to fund upgrades, expansions, recruit and retain employees and

physicians will become more challenging and limit because of inadequate

provider payments from investors, insurance companies and public programs.

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The civil service culture presents other unique challenges for healthcare

organizations, such as the acceptance and speed on change and ability to

innovate.

Here are some macroeconomic factor (PEST analysis) including political,

economic, social and technology factors that we have to concern to in surrounding

hospital.

Political factors include government regulations and legal issues and define

both formal and informal rules under which the hospital must operate. Some

examples include: tax policy, employment laws, environmental regulations,

trade restrictions and tariffs.

Economic factors affect the ability to pay of potential customers and the

hospital's cost of capital. The following are examples of factors in the macro

economy: economic growth, interest rates, and inflation rate.

Social factors include the demographic and cultural aspects of the external

macro environment. These factors affect customer needs and the size of

potential markets. Some social factors include: health consciousness,

population growth rate, age distribution, career attitudes, emphasis on safety.

Technological factors can provide comprehensive treatment or health care to

their customers the complex technology, some technological factors include:

R&D activity, automation, technology incentives and rate of technology

change.

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STRATEGY FORMULATION

After all the discussion, the essential step that Community General Hospital needs to

be taken is to change the administration. Although Community General Hospital has

changed several times of administrators, but still this is the vital step that needs to be

taken. Firstly, the admission criteria of the administration need to be tightening. For

example, a Professional Marketing Manager is needed instantly to rebranding the

hospital in order to enhance the reputation. Community General Hospital can join

venture to do social responsibilities with another hospital in order to share the cost

that needed. Although this activity is costly, however it is necessary to be done. Next,

we need to restructure the whole organization of the hospital. The organization need

to be restructured base on their criteria so that they can utilize their knowledge to help

the hospital.

When the reputation of the hospital has been grown, it will ease the financial

planner to generate more resources. By increasing the reputation, the hospital will

have more opportunity to comfort the outsiders. This is important for the hospital to

restore liquidity and rehabilitate so that it can continue its operations. Equity funding

is needed to be done to generate more sources to the hospital. The benefit of equity

funding is the hospital can generate more funds but no need to pay interest to the

investors. When there are more investors invest into the hospital, there will be

excessive resources to overwhelm the solvency problem. Since Community General

Hospital has purchased excessive facilities, thus, we can sell some of the assets such

as machine or property to generate funds. The debt for Community General Hospital

is extremely high so debt restructuring is needed instantly to reduce and renegotiate

its delinquent debts in order to improve and restore the liquidity so that it can continue

its operations.

In order to reduce cost, we have tried to identify new suppliers which are

nearer to our hospital to reduce the transportation cost. With the lower cost,

Community general Hospital will have a cost advantage against its competitors by

producing same services in a lower cost. This will help to increase the number of

customers. Meanwhile, to reduce the probability of non-paying patients, Community

General Hospital has affiliation with AIA insurance company. For the patients that

have bought any medical insurance, the cost will be bare mostly by the insurance

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company. Besides, Community General Hospital also indulges themselves as a

medical adviser to certain corporate companies. In order to need more customers,

Community General Hospital is trying for more corporate companies. To defend

against competitive forces, several steps of generic strategies also have been made to

reduce the costs for the hospital.

STRATEGY IMPLEMENTATION

On top of that, strategy implementation also is essential. Community General Hospital

will provide several technical training programs to enhance the ability of the

employees. Community General Hospital will implement regularly schedule

programs. By implementing routine programs such as short training forums or

discussion, employees will be exposed to the condition of the hospital regularly.

Besides, Community General Hospital will run manager’s training analysis workshop

to assess their department training needs, they will be exposed by the latest

knowledge and information that can continuously compete with the competitors and

to avoid losses to the hospital.

Community General Hospital will also develop a community outreach

program. By establishing network within the community, the Technology Training

Program will gain a reputation for being innovative resource. Workshop for doctors

also will be provided to improve the criteria to the doctors. With the latest knowledge,

doctors can provide excellent service to the customers.

Without the staff, there are no ways to success. In order to achieve the mission

and objectives, incentives like provide a luxuries trips to the top ten employees.

Besides all of the employees will have health and medical insures by the AIA

insurance companies.

Although this step is costly, however, it is a must to be done to motivate and

provide self-enrichment to the employees to perform more in their workforce to

achieve the objectives of the hospital and keep the progression of hospital on track.

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PRO FORMA ANALYSIS

Pro forma financial statements are an analyst’s best guess as to how a target company

will perform in the future. These estimates reflect the cost reductions and synergies,

as well as revenue enhancements. In the process of developing pro forma financial

statements, it is a necessity to make numerous assumptions about events that have yet

to occur. The preparation of the pro forma statements is normally follows six-step

process.

Forecast revenues for the target company.

Forecast operating expenses.

Forecast the change and composition of total assets on the balance sheet.

Set total equities equal to total assets and forecast the long-term financing.

Complete the pro forma income statement and balance sheet by forecasting

interest costs and income taxes.

Derive the pro forma statement of cash flows from pro forma income

statements and balance sheets.

To illustrate the types of forecasting and modeling decisions inherent in the

preparation of pro forma financial statements, we begin with Exhibit 1 and 2 given,

which contains the condensed historical income statements and balance sheets of

Community General Hospital for year 1994 and 1995 respectively. We assume that

the revenue growth will be at 25% after the hospital implemented solutions that

guided by financial professions. In 1995, the hospital expensed around 95% in its

operating expenses over the sales. But, in the next year, we assume that the expenses

will reduce by 25% through the cost reduction plans. Excess of revenue will be

treated as retained earnings in income statement. We use the common-size percentage

from balance sheet 1995 to forecast the changes of current assets, current liabilities

and net fixed assets will be as direct proportion to sales. In addition, we assume that

the amount of other assets, fund deficit and nonrecurring bad-debt write-off are

remained constant over the years. The value of debt in balance sheet is the long term

liabilities, which we sum up the capital lease and liabilities subject to compromise. By

doing so, we can easily observe that amount of debt will be decrease due to

incremental of revenue and reduction of operating expenses.

Sales growth 25%

19


Expenses/sales 70%Interest rate (debt) 0.48%Depreciation rate 10%Current assets/sales 25%Current liabilities/sales 45%Net fixed assets/sales 68%Interest rate (cash) 8%

Table above shows the assumptions made when we propose the pro forma

financial statements. Community General Hospital’s pro forma results from year 1996

to 2005 presented in Exhibit 3.1 to 3.2. In pro forma income statement, we may

observe that the expenses & losses in excess of revenues and gains had been changed

from deficit value to positive value over the years. Incremental revenue and cost

reduction have covered the cash outflow activities and proposed to gain in future. For

pro forma balance sheet, the amount of cash became zero from year 1996 until 2004

because cash is used to pay bills and recover debts until debts became zero at 2005.

Then, excessive cash will be invested to earn interest on it. No cash in hand may be

dangerous and unrealistic, but it is just a forecasted financial statement.

CONCLUSION

For the managerial aspect, as a financial consultant of the Community General

Hospital, we suggest that the hospital should have good leadership in the management

team. The leaders must have sufficient knowledge and experience to manage the

operation of the hospital and employees. Effective leaders manage performance by

setting their expectations clearly and concisely as well as make right decision in right

condition. For the financial aspect, as a good consultant should know the hospital’s

financial situation clearly when overcome the problems such as generate more

revenue instead of reduce the bad debt. Through the financial ratio analysis, SWOT

analysis and strategic planning, we can more able to understand the weakness and the

strength of the hospital. In short, Community General Hospital is facing significantly

crisis problem. All solutions needed to be done in financial and managerial aspect

instantly. Strategic planning is vital to budgeting and forecasting the hospital to

survive and establish a future growth. With all the aspects, Community General

Hospital will definitely able to overwhelm the problems.

20


REFERENCES

BIBLIOGRAPHY CPACLASS. (n.d.). Accounting Ratios for Financial Statement Analysis.

Retrieved 1 March, 2012, from http://cpaclass.com/fsa/ratio-01a.htm

Hospital Corporation of America. (n.d.). Annual Reports. Retrieved 1 March, 2012, from

http://media.corporate-ir.net/media_files/irol/63/63489/pdfs/05AnnualReport.pdf

QuickMBA. (n.d.). The Strategic Planning Process. Retrieved 2 March, 2012, from

http://www.quickmba.com/strategy/strategic-planning/

21


APPENDIX

Exhibit 1.1 - Formula of Financial Ratio

A) Profitability

i.

1994 1995

PM= −7874468914668

=−0 . 0883 PM= −67100410112009

=−0 . 0664

ii.

1994 1995

ROA= −78744610600209

=−0 . 0743 ROA= −67100410543410

=−0 . 0636

iii.

1994 1995

ROE= −787446−15849492

= 0 . 0497 ROE= −671004−15996631

= 0 . 0419

B) Solvency

Short Term

i.

1994 1995

QR= 26963924477630

= 0 .6022 QR= 30653094538653

= 0 .6754

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Pr ofit marg in=net incomesales

Re turn on asset (ROA )=net incometotal asset

Re turn on equity ( ROE )= net incometotal equity

Quick ratio= current assets−inventoriescurrent liabilities


ii.

1994 1995

CR= 2696392−2719974477630

= 0 . 5414 CR= 3065309−2771914538653

= 0 . 6143

Long Term

i.

1994 1995

TDR=10600209−(−15849492 )10600209

= 2 .4952

TDR=10543410−(−15996631 )10543410

= 2.5172

ii.

1994 1995

DER= 26449701−15849492

=−1. 6688 DER= 26540041−15996631

=−1. 6591

iii.

1994 1995

LTDR=2197207121972071−15849492

= 3. 5887

LTDR=2197207121972071−15996631

= 3 . 6711

iv.

1994 1995

EM=10600209−15849492

=−0. 6688 EM= 10543410−15996631

=−0 .6591

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sliabilitiecurrent

assetscurrentratioCurrent

Total debt ratio= total assets−total equitytotal assets

Debt / Equity ratio= total debttotal equity

Long term debt ratio= long term debt( long term debt +total equity )

Equity multiplies= total assetstotal equity


Exhibit 2.1 – Income Statement of HCA

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