Financial Management in Healthcare Organisations by Mr - Unit 3 - Financial Management

Unit 3 Financial Management 3.1 Introduction to financial management in healthcare organisations Finances are an important factor today in healthcare Financial decisions made in healthcare have greater impacts in service delivery and quality of services Financial management is a decision science. Accounting provides decision makers with a rational means by which to budget for and measure a business’s financial performance, financial management provides the theory, concepts, and tools necessary to make better decisions. Financial management plays a much larger role in the overall management of a business. The primary role of financial management is to plan for, acquire, and utilize funds (capital) to maximize the efficiency and value of the enterprise. Because of this role, financial management is known also as capital finance. The specific goals of financial management depend on the nature of the business, hence, healthcare is special. In larger organizations, financial management and accounting are separate functions, although the accounting function typically is carried out under the direction of the organization’s chief financial officer (CFO) and hence falls under the overall category of “finance.” In general, the financial management function includes the following activities: Evaluation and planning: First and foremost, financial management involves evaluating the financial effectiveness of current operations and planning for the future. Long-term investment decisions: Although these decisions are more important to senior management, managers at all levels must be concerned with the capital investment decision process. Such decisions focus on the acquisition of new facilities and equipment (fixed assets) and are the primary means by which businesses implement strategic plans; hence, they play a key role in a business’s financial future. Financing decisions: All organizations must raise funds to buy the assets necessary to support operations. Such decisions involve the choice between the use of internal versus external funds, the use of debt versus equity capital, and the use of long-term versus short-term debt. Although senior managers typically make financing decisions, these choices have ramifications for managers at all levels. Working capital management: An organization’s current, or short term, assets, such as cash, marketable securities, receivables, and inventories, must be properly managed to ensure operational effectiveness and reduce costs. Generally, managers at all levels are involved, to some extent, in short-term asset management, which is often called working capital management. Contract management: Health services organizations must negotiate, sign, and monitor contracts with managed care organizations and thirdparty payers. The financial staff typically has primary responsibility for these tasks, but managers at all levels are involved in these activities and must be aware of their effect on operating decisions. Financial risk management: Many financial transactions that take place to support the operations of a business can increase a business’s risk. Thus, an important financial management activity is to control financial risk. In times of high profitability and abundant financial resources, the finance function tends to decline in importance, however, healthcare providers are facing an increasingly hostile financial environment, and any business that ignores the finance function runs the risk of financial deterioration, which ultimately can lead to bankruptcy and closure. In recent years, providers have been redesigning their finance functions to recognize the changes that have been occurring in the health services industry. Historically, the practice of finance had been driven by the Medicare program, which demanded that providers (primarily hospitals) churn out a multitude of reports to comply with regulations and maximize Medicare revenues. Third-party reimbursement complexities meant that a large amount of time had to be spent on cumbersome accounting, billing, and collection procedures. Thus, instead of focusing on value-adding activities, most finance work focused on bureaucratic functions. Today, to be of maximum value to the enterprise, the finance function must support cost-containment efforts, managed care and other payer contract negotiations, joint venture decisions, and integrated delivery system participation. Finance must help lead organizations into the future rather than merely record what has happened in the past. All business decisions have financial implications, so all managers—whether in operations, marketing, personnel, or facilities—must know enough about financial management to incorporate financial implications in decisions about their own specialized areas. An understanding of the theory and principles of financial management will make them even more effective at their own specialized work. Important actions for …