Faculty Practice Foundation

Finance 101
June, 2015

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Session Objective
• Broaden member understanding of basic financial
principles
• Provide members with a general overview of
financial statements and how they are interpreted

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Agenda
• Faculty Practice Foundation Overview
• Financial Statements
Objective of Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
• Case Studies

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 Faculty Practice Foundation Overview

Faculty Practice Foundation Inc. (FPF)

• Nonprofit Organization (501c3 – tax exempt)
• Consists of 19 individual Faculty Practice Plans (FPPs)
 Separate nonprofit organizations with Unique Tax ID #’s
 Individual Operating Budgets and Financial Statements
• Consolidated FPF Financial Statements roll up to Boston Medical
Center
• Fiscal Year 7/1 – 6/30 (Academic Year)
• One FPF Board of Directors with two corporate members (BMC &
BUSM)

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 FPF Governance
(Revised as of March 2012)

Members Karen Antman Kate Walsh Reserve

Dean BUSM BMC CEO Powers

FPF Board of Directors

BMC CEO 2: Fam Med, Pediatrics, OB/GYN

BUSM Dean 2: Radiology, Pathology, Emerg Med
FPF CEO 3: Opth, Urology, ENT, Ortho
Chair of Medicine 3: Derm, Neurosurg, Neurology, Psych
Chair of Surgery

William Creevy, MD
President & CEO

FPP Presidents Mary Chapin

Department Chairs Chief Administrative Officer J. Lindstedt, VP Finance &CFO
J Camillus, VP Amb & Prof Svcs
C Charyulu, VP Revenue Cycle
Administrative Directors FPF Administrative Staff

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Legal Relationship of FPF to BMC and BUSM
• BMC and BUSM are the two corporate members of
the FPF
• Role of corporate member
 Appoint FPF Board of Directors
 May amend bylaws
 Approval of certain actions (reserved powers)
o Addition of new member
o Loan agreements / guarantees
o Agreement to sell, assign, convey, transfer a security interest or
mortgage or otherwise encumber the accounts or assets
o Merger, consolidation, reorganization, liquidation, dissolution of
the FPF or a sale of all or substantially all its’ assets
o Increase or decrease the number of Directors

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Financial Statements

• Income Statement
• Balance Sheet
• Statement of Cash Flows

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Objective of Financial Statements
• Provide information useful for the entity’s stakeholders
 Owners, Management, Directors
 Creditors
 Regulatory agencies
 Investors
• Support business and economic decisions
 Transparency – understand the health of a business and how
well resources are being manage
 Management principle – If you can’t measure it, you can’t
manage it
• Used to formulate budgets
 Use historical data to create plans
 Compare actuals to planned targets
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Income Statement

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Income Statement
• Reports the “profitability” of operations
• Net income = “bottom line”
• Specific period of time
 Monthly
 Quarterly
 Annual (fiscal year)

Net Income = Revenue - Expenses

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Income Statement – Generic Example
Generic Hospital - Income Statement
January 2015, Month to date
Operating Revenue:
Net Patient Service Revenue $550,000
Other Revenue 100,000
Total Operating Revenue 650,000

Operating Expenses:
Salary, Wages, & Fringe Benefits 450,000
Provision for Bad Debts 50,000
Depreciation 10,000
Other Expenses 100,000
Total Operating Expenses 610,000

Income (loss) from operation 40,000

Non-Operating Gains (losses)

Total Non-operating Gains (losses) 50,000

Net Income / (Loss) $90,000

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Income Statement –
Net Patient Service Revenue (NPSR)
Gross Patient Service Revenue (GPSR) $1,170,000
Free Care (20,000)
Contractual Adjustment (600,000)
Net Patient Service Revenue (NPSR) $550,000

Net Patient Service Revenue consists of…

• Gross Patient Service Revenue (GPSR) – charges for services provided to
patients (sources include: E&M, surgery, procedures, casts, radiology, etc.)
• Free Care – work done for patients without insurance
• Contractual Adjustment – amount of charge not expected to be paid based
upon contractual agreements

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Income Statement –
Other Revenue
Other Revenue
• Ancillary services (includes
Physical Therapy, MRI, Surgical
Center)
• Grants
• Physician wages from other
entities (includes Health
Center revenue and Contract
revenue)

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Income Statement –
Operating Expenses
Salary, Wages, & Fringe Benefits
• Physician and support staff salary,
wages, and fringe benefits make up
>80% of all operating expenses
Provision for Bad Debts
• Amount of revenue expected to be
collected, but not actually collected
Depreciation
• Reduction in the value of company
assets with the passage of time
Other (Operating) Expenses
• Include: Billing company fees,
Malpractice, Clinical Supplies,
Institutional Fees, Rent,
Administrative costs, etc.

AY14 - 82% of FPF Operating Expenses were Salary & Fringe Benefits
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Income Statement –
Non-Operating Gains (losses)

Non-Operating Gains (losses)

• Income derived from activities
not related to core operations
• Includes profits (and losses)
from investments, donations
and other non-operating
revenues and expenses

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Income Statement –
Financial Indicators - Profitability
Ratio Formula Performance Implication

Operating Margin Net Operating Income Measures a company’s profit

Total Op. Revenue after paying operating costs

Total Margin Net Income Measures a company’s net profit,

Total Op. Revenue inclusive of both operating and non-
operating costs

Bad Debt % Provision for Bad Debts Measures the % of collectible revenue
Total Patient Net Rev. or GPSR that has been lost

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Income Statement –
Financial Indicators - Profitability

Operating Margin
(Net Operating Income / Total Op. Revenue)

6.2% = 40,000 / 650,000

Total Margin
(Net Income / Total Op. Revenue)

13.8% = 90,000 / 650,000

Bad Debt %
(Provision for Bad Debts / Total Patient Net Rev.
or GPSR)

4.3% = 50,000 / 1,170,000*

* See slide 12 for reference

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Balance Sheet

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Balance Sheet
• Presents financial position as of a specific date
• Lists a company’s assets
 Things of value an entity owns or controls
 Were acquired at a measurable cost
• Lists a company’s sources of funds to acquire assets
 Liabilities
 Equity

Assets = Liabilities + Equity

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Balance Sheet – Generic Example
Generic Hospital – Balance Sheet
January 31, 2015
Assets:
Cash and cash equivalents $1,000,000
Patient Accounts Receivable 300,000
Prepaid Expenses 200,000
Total Current Assets 1,500,000
Property, Plant & Equipment 100,000
Total Non- Current Assets 100,000
Total Assets 1,600,000
Liabilities and Equity:
Accounts Payable and accrued expenses 1,200,000
Total Current Liabilities 1,200,000
Long-term Debt 250,000
Total Non-Current Liabilities 250,000
Unrestricted net assets 150,000
Total Equity 150,000
Total Liabilities and Equity 1,600,000
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Balance Sheet:
Current vs. Non-Current Assets
Current Assets
• Used in normal business cycle (1yr)
• Cash and cash equivalents
• Marketable securities - temporary
investments, easily converted to
cash
• Inventories
• Listed in order of decreasing
“liquidity”

Non-Current Assets
• Not expected to be depleted within
1 year
• Land = original cost
• Investments

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Balance Sheet: Liabilities & Equity
Liabilities
• Funds owed
• Accounts Payable and accrued
expenses include -
• Amounts owed to suppliers
• Amounts owed to employees
• Short term loans (lines of credit)
• Long-term debt

Equity (net assets)

• Funds obtained from equity
investors (owners who supply
“capital”)
• Retained earnings or
accumulated net income (profit)

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Balance Sheet:
Current and Non-Current Liabilities
Current Liabilities
• Obligations due within 1 year
• Accounts payable
• Accrued expenses
• Current portion long-term
debt

Non-Current Liabilities
• Obligations due > 1 year
• Long term debt
• Mortgage
• Capital leases
• Bond issues

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Balance Sheet
Financial Indicators - Liquidity
Ratio Formula Performance Implication
Working Capital Curr Assets – Curr Liabillities Identifies the dollar value of
excess assets (liabilities)

Current Ratio Current Assets Measures a company’s liquidity

Current Liabilities or their ability to cover short term debt
*Asset > Liability = + Financial strength

Days in Patient Net Patient A/R Indicates the number of days it takes
Accounts Receivable (Net Patient Rev./365) to collect payments owed to the
company

Days Cash on Hand (Cash + Cash Equivalents) Measures the number of days the
((Total Op. Exp. – Depreciation.)/365) business could operate with current
cash available

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Balance Sheet
Financial Indicators - Liquidity
Working Capital
(Current Assets less Current Liabilities)

300,000 = 1,500,000 - 1,200,000

Current Ratio
(Current Assets / Current Liabilities)

1.25 = 1,500,000 / 1,200,000

Days in Patient Acct Receivable

(Net Patient A/R / (Net Patient Revenue/365))

199 = 300,000 / (550,000*/365)

Days Cash on Hand

((Cash + Cash Equivalents) / ((Total Op. Expense
– Depreciation)/365))

608 = 1,000,000 / ((610,000* –

10,000*)/365)
* See income statement (slide 11) for reference
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Statement of Cash Flow

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Statement of Cash Flow

• Details why the amount of cash has increased or

decreased
• Shows the flows of cash in and out of the business
• Statement is divided into the following three sections
1) Operating activities
2) Investing activities
3) Financing activities

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Statement of Cash Flow – Generic Example
Generic Hospital – Statement of Cash Flow
YTD for period ending January 31, 2015
Cash flows from operating activities:
Patient accounts receivable $ 120,000
Accounts payable (60,000)
Depreciation 70,000
Provision for bad debts 20,000
Net cash provided by operating activities 150,000

Cash flows from investing activities:

Property, Plant & Equipment (110,000)
Capital expenditures (20,000)
Net cash used in investing activities (130,000)

Cash flows from financing activities:

Long-term debt & capital leases (5,000)
Net cash used in financing activities (5,000)

Net increase (decrease) in cash $15,000

Cash beginning of year $ 985,000
Cash balance period end $1,000,000
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Statement of Cash Flow
Impacting Activities
Operating
• Receive payments for services provided 
Decrease Patient Accounts Receivable,
Increase Cash
• Pay suppliers for goods and services 
Decrease Accounts Payable, Decrease Cash
• Pay employees  Decrease Accounts
Payable, Decrease Cash

Investing
• Acquire a new fixed asset  Increase
Property, Plant & Equipment, Decrease Cash
Financing
• Obtain funds by issuing long-term debt 
Increase Long-term Debt, Increase Cash
• Repay debt  Decrease Long-term Debt,
Decrease Cash

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Questions?

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Thank you!

Please provide us with some feedback and complete

the class evaluation form.

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Glossary of Terms
• BMC: Boston Medical Center
• BUSM: Boston University School of Medicine
• FPF: Faculty Practice Foundation Inc.
• FPP: Faculty Practice Plans (Departments)
• GPSR: Gross Patient Service Revenue
• NPSR: Net Patient Service Revenue
• A/R: Accounts Receivable
• A/P: Accounts Payable

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Faculty Practice Foundation
Finance 101: Case Studies
2015

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Case Study 1
Accounts Receivable

Facts
• This practice has five physicians and a good income
statement (is profitable).
• The practice’s policy is to pay bonuses if there is a
cash surplus at the end of the year. It pays $300K in
bonuses annually
• However, at the end of the year, despite higher
revenue than expenses, there is little cash surplus
• The Practice plans to collect $7,000 per day

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Case Study 1: Financial Statements
Income Statement - End of Year Balance Sheet - End of Year

Operating Revenue Assets:

Net Patient Service Revenue $ 1,650,000 Cash and cash equivalents $ 10,000
Other Revenue 70,000 Patient Accounts Receivable 800,000
Total Operating Revenue 1,720,000 Prepaid Expenses 5,000
Total Current Assets 815,000
Operating Expenses
Salary, Wages, & Fringe Benefits 1,292,000 Property, Plant & Equipment 96,000
Total Non- Current Assets 96,000
Provision for Bad Debts 50,000
Depreciation 12,000 Total Assets $ 911,000
Other Expenses 80,000
Total Operating Expenses 1,434,000 Liabilities and Equity:
Income (loss) from operation $ 286,000 Accounts Payable and accrued expenses 145,000
Total Current Liabilities 145,000
Non-Operating Gains (losses)
Total Non-operating Gains (losses) 44,000 Long-term Debt 320,000
Total Non-Current Liabilities 320,000
Net Income / (Loss) $ 330,000
Unrestricted net assets 446,000
Total Equity 446,000
Total Liabilities and Equity $ 911,000

Financial Indicators:
Working Capital $ 670,000
Current Ratio 5.6
Days in Patient A/R 177.0
Days Cash on Hand 2.6

Other Metrics:
Unbilled A/R $ 566,250
% in A/R more than 90 days 21%

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Case Study 1
Accounts Receivable

Questions
• How much of the bonus can the practice pay right
now?

• How long will the MDs have to wait to receive their

bonus in full?

• What could be done to shorten the time period?

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Case Study 2
Cash Surplus
Facts
• Revenue is down in this practice. The payer mix is poor, and
CMS calculations have dramatically reduced payments during
the year
• There are six physicians in the practice and no NPPs
 Salaries are $200K annually + 29.2% fringe ($258.4K)
• In past good years they have awarded themselves each a $50K
bonus, or $300K total cost
• This year there is enough surplus cash to fund the bonus for
one and a half more years

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Case Study 2: Financial Statements
Income Statement - End of Year Balance Sheet - End of Year

Operating Revenue Assets:

Net Patient Service Revenue $ 1,265,000 Cash and cash equivalents $ 450,000
Other Revenue 275,700 Patient Accounts Receivable 210,800
Total Operating Revenue 1,540,700 Prepaid Expenses 5,000
Operating Expenses Total Current Assets 665,800
Salary, Wages, & Fringe Benefits 1,550,400 Property, Plant & Equipment 32,000
Provision for Bad Debts 65,000 Total Non- Current Assets 32,000
Depreciation 8,000
Total Assets $ 697,800
Other Expenses 60,000
Total Operating Expenses 1,683,400
Liabilities and Equity:
Income (loss) from operation $ (142,700)
Accounts Payable and accrued expenses 42,800
Non-Operating Gains (losses) Total Current Liabilities 42,800
Total Non-operating Gains (losses) 35,000
Net Income / (Loss) $ (107,700) Long-term Debt 90,000
Total Non-Current Liabilities 90,000
Unrestricted net assets 565,000
Total Equity 565,000
Total Liabilities and Equity $ 697,800

Financial Indicators:
Working Capital $ 623,000
Current Ratio 15.6
Days in Patient A/R 60.8
Days Cash on Hand 98.0
Other Metrics:
Unbilled A/R $ 31,600
% in A/R more than 90 days 23%
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Case Study 2
Cash Surplus

Questions
• What could the practice do with the extra cash?

• What are the implications in relation to that

decision?

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