Financial management

Satish 2

Finance management

• Why do we discuss? Introduction and

Objectives

• Basic finance literacy

• Budgeting

• Accounting ,Cost Accounting and Cost

Containment

• Investments

• Some general tips on day to day matters

Satish 3

Why should we discuss?• Profession vs. Business

• Every medical practice, small or big, is a business

• Huge investments – expected returns

• An entrepreneur- by default

• Profit - a dirty word?

• Survival and growth

• Self employed - look after your own finances and control them

• Problems: doctors tend to be ignorant & careless about finances, sitting ducks, frauds

Satish 4

Objectives• To create awareness

• To stimulate to further learning

• To develop a vision

• To develop an ability to plan and control with

clinical precision

• To equip our selves to ask right questions to CA

• To develop a healthy practice with patients as

beneficiaries

Satish 5

Financial management – definition

• It is the art and science of managing money

• The most essential requirement of any organized

business or activity

• The process of procuring and judicious use of

resources with a view to maximize the value of

the firm

• Interdependence with other areas of management

Satish 6

Basic finance literacy1. Income and expenditure statement

2. Cash flow: outgoing, incoming

3. Balance sheet: final accounting item

(what the practice is worth)

4. Budgeting: a process of estimation of

income and expenditure

5. Assets

6. Liabilities

7. Capital

Satish 7

Balance Sheet

A statement of assets, liabilities and capital on a given date

Assets:

• Fixed: land, building, equipments etc

• Current: Cash in hand or in bank, stocks, debtors

Liabilities

• Long term: Loans > 1 yr

• Current/ short term: overdraft, taxes

Capital= Assets -Liabilities

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Some core issues

• Budget

• Accounting

• Cost Accounting

• Break even point

• Cost benefit analysis

• Cost reductions and containment

• Day to day activities

Satish 9

Budget

• An important instrument of the financial management

used as aid in planning, programming and control

• A budget may be defined as a financial and

quantitative statement, prepared and approved prior

to defined period of time, of the policy to be pursued

during that period for the purpose of achieving the

given objective.

Satish 10

Budget: advantages

It is a tool for -

a) Quantitative expression of the planning

b) Evaluation of financial performance in

accordance with plans

c) Controlling costs

d) Optimizing the use of resources

e) Directing the total efforts in to the most

profitable channels

Satish 11

Planning & preparing budget

• Well in advance

• An opportunity to plan expansion or

improving services , hence involve staff

and all departments

• Plans must be realistic

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Types of budget

Importance :Understanding of various types of

budget can indirectly help us understand

various methods of finance management

1. Project budget : probable expenditure and

likely revenue for a specific project

2. Departmental budget

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Types of budget3. Operating revenue budget- related to volume

of work anticipated

4. Operating expenditure budget: recurring expenditures for operation and maintenance of services e.g. salaries and wages, supplies, support utilities, maintenance

5. Capital budget ( non recurrent ): meant for growth ( new facilities), replacement of obsolete. Needs are many – prioritize

6. Cash budget : provision for anticipated cash expenditures , for planning the cash flow e.g. salaries, bills etc.

Satish 14

Accounting

• An art of recording , classifying and

summarizing data in a significant manner and

interpreting the results

• Data may be in form of money transactions

and events which are, in part at least , of a

financial character

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Types of accounting

1. Financial accounting: documentation of facts,

daily transactions

2. Cost accounting : expenditure for a

particular service

3. Management accounting : Analysis and

interpretation of financial information for

management purpose

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Nomenclature a) Costing: to find out money spent on a service

b) Cost center: an allied group of activities in a hospital

eg laboratory, immunization, laundry service

c) Cost object: anything for which separate

measurement of cost is desired e.g. rooms, OT, ICU,

equipment

d) Cost unit: a measurable detail of service rendered

e.g. linen, laboratory investigation

Satish 17

Categories of expenditures

Important in understanding dynamics of costing

1. Capital Vs Recurring

2. Fixed Vs Variable

Fixed : Remains unchanged despite changes in

related level or volume of activity e.g. salary of

permanent staff

Variable – volume dependent, varies in proportion

to changes in level of activity e.g. medicines,

consumables, power cost

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3.Direct vs indirect expenditures

• Direct : Clearly linked to a service

• Indirect: can not be clearly linked to a

particular cost object e.g.

administration cost,security cost

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Objectives & advantages of costing

1. To get clear picture of financial situation

2. Identifying profitable and non profitable

segments and taking action accordingly

3. To decide pricing of services and discounts

4. To decide for out sourcing of services

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Advantages of costing

5. Helps in entering into agreements with

TPA, corporate clients etc

6. Helps in identifying wastages

7. Helps in budgeting, planning

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Effective cost accounting

1. Proper records

2. Proper segmentation of costs

3. Sound accounting practices,regularity

4. Record of utilization of equipments

5. Record and analysis of man power

utilization

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Difficulties in cost accounting

1. Many inputs have to be considered e.g.

labor, material, depreciation,

2. Every transaction has to carry a price tag

3. Variation in quality of service e.g. consultant

to consultant, patient to patient

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Break - even analysis• Volume of activity at which total income just

equals total variable and fixed costs

• Lower break even point is more desirable e.g.

bed occupancy 60% Vs 80%

• Advantages: Equipment selection and

purchase decision, formulating price policy

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Cost - benefit analysis

• An economic technique and formalized

way of comparing the cost and benefit

of undertaking an activity / project

Satish 25

Expenditure - containment and cost -

cutting• Sound economic sense

• It does not mean compromising quality

1. Promote awareness amongst staff

2. Practice cost monitoring: analyze actual

expenditure against budget and standards , find

reasons for variations, work on them

3. Cost management: establish systems with

responsibility and accountability

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4.Strategies for expenditure control

a) Decrease the cost of inputs relative to

outputs: materials, man power

b) Increase output relative to input: scheduling

of procedures, automation , remove bottle -

neck in the flow of services

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5.Cost saving areasa) Streamlining of services e.g. laboratory, OT, indoor

b) Purchases : planning, budgeting, bargaining, group

purchasing

c) Preventive maintenance AMC’s, back ups

d) Planning stage: quality manpower and machines,

planned recruitment, up gradation

e) Good accounting practices: automation, internal

audit

f) Energy audit

Satish 28

Investments

• We work hard to make money, but learn to

make your money work for you

• Daily wage earners

• Save, invest, build wealth, spend, give it away

• Invest some percentage in improving services,

facilities

• Stagnation without growth

Satish 29

Personal investments• Required for future expansion and growth

• Commitment to the financial needs of the

family

• Retirement planning

• Building wealth.

Satish 30

Various investment avenues

1. Real Estate

2. Gold and Jewellery

3. Government

Securities

4. Company Deposits

5. Mutual Funds

6. Equity

7. ULIP

8. Bank & company

FDs

Satish 31

Some tips on day to day activities

1.Accounting

a) Financial memory of practice

b) Matter of self discipline

c) Meticulous record of financial transactions

- legal requirement e.g. Form 3c

d) Employ accountant - good documentation

and reports generation

2. Computerization

3. Periodic meetings with CA

Satish 32

4. Handling cash

• Staff handles lot of cash

• Doctors are too busy to supervise

• Easy temptation

• Introduce checks and balances - ensure strict cash

control

• Cash collection at counter (many advantages )

• Minimize temptation for staff

Satish 33

Tips

5. Deposit cash in bank daily or twice weekly

6. Have 2 distinct streams of cash flow

Cash inflow deposit daily

Cash outflow by withdrawal

7. Make schedule for making payments

8. Documentation support for all payments

9. Filing system: cash memos, paid bills, pending bills

10. Get personally involved for big transactions

Satish 34

Tips

11. Reconcile bank statements

12. Do not allow anyone to take records home

13. To your staff, demonstrate your awareness

about what is going on and that you are

careful about money

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14.Handling search and seizure

a) Keep your cool

b) Call your best friends as witnesses

c) Know your rights

d) Prevention is better than cure

Satish 36

Thanks